Loans for small business

Until a few years ago, large institutions had few advantages in lending to small business. Loans were made to small commercial customers in more or less the same fashion as to large corporations: Each loan was considered unique, and there were few economies of scale. Borrowers had to supply detailed information about business plans, balance sheets, cash flow and profits. An underwriter painstakingly reviewed the data using procedures that were time-consuming and costly. And because the prospects of a small enterprise are so difficult to judge, conventional wisdom held that credit decisions couldn’t be made from far away. Only a local banker with knowledge of the area could accurately size up a borrower’s credit-worthiness.

Many large banks have had a history of on-again, off-again interest in small business. When opportunities in the corporate sector were scarce, managers would order the troops into the small-business market. But no one could figure out how to make a buck by lending small amounts to small business. It was like cars in the days before Henry Ford-no one could afford one because each was hand-made.

But computerized technology permits-in fact demands-mass production. As a result, a growing number of large banks and nonbank financial institutions have tossed out their old rule books and stopped treating small businesses like pint-sized versions of their corporate customers. Fundamentally, the small business customer is a retail customer.

In making credit decisions, major lenders have started to apply to small business the statistics-based methods long used to review consumer applications for credit cards and mortgages. With credit scoring, as the system is known, lenders no longer need to perform a detailed financial review of each borrower. Instead, they pinpoint a few key pieces of information that assess the statistical probability that a borrower will repay, such as a business owner’s record in paying off personal debts.

The applications are processed in loan factories in which assembly-line techniques are used to drive through large volumes. The new processes trim application processing time to as little as 15 minutes and lower the cost of making Nevada payday loans from thousands to hundreds of dollars. That makes it profitable for lenders to offer business credits in amounts as small as $5,000. It gives them the option of offering cut-rate prices to generate business. And it allows them to shrink applications to the size of a credit card form.

Credit-scoring technology has been used on consumer loans since the 1960s, but until this decade no one had collected the large volume of data on small business credit behavior needed to develop statistically reliable predictive models. It wasn’t until the early 1990s that vendors began making small business scoring systems commercially available.

Credit scoring, of course, is available to community banks as well as big regionals. But small institutions don’t have enough loans on their books to manage credits on a statistical, or portfolio, basis. A portfolio lender monitors delinquency rates rather than individual credits.

For this reason, there is a basic difference between the way big and small lenders use credit scoring. Large-scale lenders use it as a decision-making system, and applicants with sufficiently high scores generally get a loan. Community banks still use humans rather than computers to make credit judgments, but may use credit scoring to sort applicants, or as one of several factors taken into account in making decisions.

WHAT SHOULD I KNOW ABOUT IMPROVING MY CREDIT RATING?

Q: What is “bad credit”?

A: “Bad credit” refers to a poor credit record, indicated by delays in paying bills or record of financial judgments, liens, bankruptcy filings or collection agency accounts.

Q: How can I research my credit record?

A: To get a copy of your file, call one of the three national computerized credit reporting agencies.

Q: What types of things show up on a credit report?

A: In addition to the “bad credit” items listed above, the payment history of every account you have will be reported to the credit reporting agencies.

This includes credit cards, department store charge cards, auto and home loans, and accounts with utility providers.

Q: How long does information stay on the credit report?

A: Adverse information remains on your credit record for seven years from the last transaction date. Bankruptcy filings, however, will stay on the record for 10 years.

Q: How will a mortgage lender perceive problems in my credit record? Are some types of credit problems worse than others?

A: Policies on how to evaluate a credit report will vary among lenders. Generally, a lender will look for any present delinquent accounts, then look for accounts paid off but very slowly. It is more damaging if the slow-pay closed accounts were recent. The older the delinquent information, the less damaging it is.

Bankruptcy is probably the worst derogatory item that could appear, in that it reflects character. It would in almost all cases cause a lender to deny a loan. A delinquency of 90 days in a payment, particularly if it occurred some years, ago, might be forgiven by a lender.

Lenders will likely question the record of an applicant with loans for bad credit and credit accounts beyond what the lender considers normal, say, six or more bank card accounts that are either current or inactive.

Q: How can I remedy problems in my credit record? When will a lender consider me a good credit risk?

A: More recent up-to-date accounts will mitigate some of the damage of older delinquent information.

If it’s difficult to get a credit card because of derogatory information on file or a weak employment record, it’s possible to get a “secured” bank card, which, if paid promptly for a period of time, will improve the credit file. The fact the card is secured by a deposit is not reported, therefore it will show on your record as a bank card (Visa or Mastercard) that is paid promptly. Most secured-card companies will return the deposit after a reasonable good-pay record is established and will continue the account as a normal unsecured account. The deposit earns interest, which is eventually returned to the depositor.

It is not recommended that you deal with a secured-card company that requires you to buy exclusively its merchandise.

A lender will consider you a good credit risk once recent accounts have been paid on a current basis for around a year, your employment record is stable and income capacity is ample to handle financial obligations.

Q: What can I do if the credit report is inaccurate?

A: The history of how you paid your accounts cannot be changed. The only exceptions are errors made by the creditor reporting the item or if the credit reporting agency places items on the wrong person’s file.

If you believe there is an error, write to the credit reporting agency asking for a correction. The agency then will request the creditor to verify the facts and if it is found to be an error, will ask that it be removed. This process should be resolved in 30 days. If there is a dispute (for example, the consumer says he returned the item but didn’t get credit and the creditor has no record of the return), the applicant can submit a short statement to the credit reporting agency, fewer than 100 words, setting forth his side of the dispute. Any future credit reports obtained by a prospective creditor will contain that statement. However, the prospective creditor will use judgment on the veracity of the consumer’s statement.

Q: Should I consider a visit to a “credit doctor”? Where can I go for reliable credit counseling?

A: Paying money to a so-called “credit doctor” to eliminate a derogatory item is throwing money away. If there is truly an error, the consumer can correct it as described above, without any cost. If it’s not an error, it will not be removed.

AUDITORS IN THE EUROPEAN SINGLE MARKET

The European Commission’s Green Paper on auditing represents an important opportunity to enhance the role of the statutory auditor.

Stimulate Telecom Audit Services in Europe towards the highest quality and best standards in the world. European auditors have always pursued this aim of excellence, and will continue to do so in the future. FEE has affirmed this to the Commission on behalf of its 34 member institutes in 22 European countries; it has therefore welcomed the Commission’s initiative and will work with the Commission to help it succeed.

The Commission’s task is to complete the single market. It wants an efficient market, effective allocation of capital and European companies able to compete strongly in world trade. It sees transparent financial reporting and sound control by directors as powerful tools for this purpose. It sees that statutory audit provides pressure to use these tools well, so it wants the conduct and reporting of audits in Europe to converge and auditors to have the freedom to practise within Europe. The focus of the initiative is to remove barriers to the single market, leaving only restrictions that are needed to protect the public interest in audit. But, of course, convergence is not enough. The single market looks for the highest quality at a fair, competitive price. Quality must be maintained and enhanced. The mutuality of interest in quality between government, companies and auditors is clear.

The Commission therefore commissioned a study to identify barriers to auditing services in Europe. By doing so, it attracted submissions from others, including FEE. These inputs enabled the Commission to issue its Green Paper.

FEE has now submitted its response to the Commission. In doing so, it was speaking with the authority of the European accounting profession – it has worked with a core team from major institutes, supported by working parties of over 50 national representatives, for the last 18 months to bring together our profession’s view.

The team concludes that the public interest will be best served if the profession continues to manage its affairs within a general legal framework.

The law should require statutory audits, but leave the detail of how audits should be accomplished to the professionals. A remarkably high convergence of audit methodology, reporting and quality control has already been achieved.

Generally, national requirements reflect those in place elsewhere in Europe and the world. Going forward, adapting to rapidly changing business conditions and meeting the reasonable expectations of knowledgeable people requires flexibility exercised by a responsible profession accountable for its actions.

Two examples show how this has worked up until now. Twenty years ago, Europe’s auditors recognized that auditing and ethical standards agreed internationally were needed. Their representatives therefore took a large part in developing International Standards on Auditing. Since they helped to draft them, it was easy for FEE members to agree to apply these standards nationally. One of the Commission’s important concerns is for audit reports in each country to say and mean the same thing. This is covered by ISA 700 and progress in implementing it in Europe has gone a long way to meeting the concern. FEE believes that the course charted two decades ago continues to be the best route to today’s single market objectives.

Having standards is one thing. Enforcing them and demonstrating to the public that they are enforced is another. Corporate financial failures have focused the mind. Even if the causes of failure have nothing to do with the audit, the public is justified in wishing to know that audit safeguards are properly in place. Most European countries have therefore established quality control structures in recent years. The inter-relationship of the profession and public authority varies according to each country and its juridical background, but it remains the profession’s task to make the structures work and be seen to work. Giving confidence in quality control requires unceasing vigilance, and FEE’s members are considering how this might be raised to the Europe-wide level, with due regard to ‘subsidiarity’.

These comments imply that the work of the Commission and of FEE and others so far has revealed few barriers and few impediments to the quality of audit likely to require legislation at the European level. FEE thinks this is so. European intervention may be needed to give group auditors access to information held abroad by affiliated entities, but this was the only clear example. Obviously, there is work to be done by both the legislator and the profession to achieve proper convergence at the national level. But this may best be achieved by encouragement. ‘Stimulate’ is the right word. By examining the auditor’s role and suggesting that legislative pressure could possibly follow, the Commission has succeeded in provoking reflection and action. We may hope that the action will be common action.

At the national level there is much to be done. The legislator has to define what each person engaged in business is required to do, and the reporting or other conditions under which he or she should do it. Legislation is needed mainly to clarify responsibilities and to undo inappropriate legislation in the past. From the auditors’ viewpoint, this relates mainly to putting them into a position where they can meet the public’s proper expectations, either by setting out the area of expectation – for example reporting on fraud or going concern – or by making progress on auditors’ exposure to liability.

This becomes more and more important as auditors’ new responsibilities move further from historic fact towards judgmental or future-based information.

Once the question of ‘what to do’ has been clarified by the legislator, the task of the profession – not the public authority – should be to decide ‘how to’ accomplish the task and demonstrate that it has been completed.

FEE sees the Commission’s audit initiative as an important opportunity to clarify and enhance the statutory auditor’s role. The public interest – that is to say the whole array of mutual interests involved in developing a single market in which everybody is an economic winner – makes the task immensely worthwhile. FEE and its members have every intention of working together to make the initiative a success. The shoulder is already to the wheel.

Market and Economic Value Added for Business

Despite numerous tools available to investors to assess company performance, few can tell them what they really want to know – whether their investment will grow in value.

And not many ratios reveal how much wealth a company is creating, or destroying.

But a model designed by New York.-based financial consulting firm Stern Stewart & Co. not only shows how much wealth a company has created for its shareholders, but gives management the tools they need to increase it.

And in this era of executive pay disclosure, it offers a benchmark for executive performance.

While increasing shareholder wealth is one of the first tenets of management, it all too often put on the back burner. And even when it is a company’s top priority, it can be difficult to measure.

“For years now, there has been a question of how to motivate management to make decisions that are truly effective, in that they use resources efficiently so that they satisfy customers, and in the end, enhance the wealth formula of shareholders,” says Bennett Stewart senior partner at Stern Stewart.

Market Value Added (MVA) measures the most basic principle of business management that any investment of a company’s capital in a new project, equipment, or employee should give investors a value that is at least equal to the cost of the investment. MVA measures that value and is explained by present value of a firm’s economic value added, or EVA.

EVA is after-tax operating profit minus the cost of capital.

Since EVA is a measure of ongoing and current value in a business, it is the measure that can be used to bring about change in the way an organization is run.

Based on figures from the Financial Post DataGroup, the accompanying tables rate 300 Canadian-based companies by the MVA and EVA yardstick. The figures are based on fiscal year-end 2005, with subsidiaries listed separately to avoid their being counted twice (once with the parent company and once alone). Financial institutions, utilities, rael estate companies, and financial management companies are excluded from the ranking because of the difficulty of comparing their operating income with that of non-financial companies.

Investors can use MVA to learn surprising, and sometimes disquieting, information about companies.

Transportation and environmental services, communications and media and consumer products all created more wealth than the overall MVA average, while oil and gas, industrial products, merchandising and paper and forest companies, although generating wealth and shareholder value, created less than average.

It should be noted that the paper and forest products industry is the only one of the 10 subindexes to show a positive average EVA.

The relationship between EVA and MVA is significant, since it can highlight discord between actual (shown in the EVA) and expected (shown in the MVA) performance.

Arriving at the total Market Value Added (MVA) figure for a company involves adding all of the capital the company has amassed over its life span, through equity and debt issues, bank loans, and retained earnings.

Further adjustments are made, specific to each company, that account for such things as capitalized research and development costs as an investment in future earnings that is then amortized over an appropriate period.

Subtract the current value of equity and debt from that adjusted capital figure. That is MVA.

The difference between total market value, or the amount readily available to investors (for instance, by selling their shares), and the amount they have invested over the years, is MVA.

A positive MVA number means wealth has been created, while a negative number means capital has been lost.

Economic Value Added (EVA) is after-tax net operating profit, minus the cost of capital for that period.

Not just the cost of debt, but the cost of equity capital as well.

Investors should know that, contrary to commonly held belief, equity capital can cost a great deal more than debt.

The accompanying tables do not capture all of those extraordinary items and may deviate from actual EVA values by 5%-30%.

AOL Ofers New Service to Get Small Businesses on Web – New Web Hosting Service Looks to Capitalize on Site Growth

In an effort to capitalize on the growing number of businesses launching web sites, America Online Inc. launched a best hosting service last week called PrimeHost.

The Dulles, Va., company claims the service will make it easier for small- and medium-sized businesses to start marketing through the web without spending thousands of dollars for a roomful of technicians, a web server to hold the site’s pages and a dedicated access line.

Although AOL is the first commercial online service provider to offer a cheap web hosting service – Microsoft Network, Prodigy and CompuServe do not have a similar web-based service – industry analysts and Internet service providers say AOL is getting into the business somewhat late, especially considering it acquired several web software firms a year ago.

“I would say AOL is catching the middle of the wave,” said Ly Finney, the director of web sales at UUNet Technologies Inc., an Internet service provider in Fairfax, Va., with $43 million in first- quarter revenues. Although UUNet offers a blog host service, Finney said a majority of the company’s revenues come from selling access to the Internet.

Despite the late entry into the web site hosting business, AOL is revered for making the online experience user-friendly to consumers. The company boasts more subscribers than any other commercial online service or access provider with 5 million U.S. subscribers and another million subscribers to its other services, which include Europe Online and Global Network Navigator.

If AOL can make designing a web site easy for a wide group of non-technical businesspeople, it would have a winning product.

“PrimeHost is for people who want a risk-free way to get on the Internet,” said Carly Ross, general manager of the PrimeHost service.

PrimeHost may provide a cheaper alternative to a heavy investment in web server technology. A recent study from Forrester Research, a market research company in Cambridge, Mass., showed that the price of a web hosting service goes up from there for security features, software and a fast Internet connection.

Ross said another advantage of AOL’s new service is its plan to rotate ad banners of its hosted sites in the PrimeHost section of the online service. That feature would give businesses which use the service exposure to the AOL audience.

“The beauty of the service is that we have an audience of 6 million people [worldwide],” Ross said.

AOL also provides web authoring tools to help people design a site. The tools were designed by Navisoft Inc., a software developer AOL acquired last year in its push toward web-based offerings. Although AOL will register a company’s site with Network Solutions Inc., the company in Herndon, Va., which handles web site registration, the company also promises to offer businesses a temporary site until a domain name is registered.

Refinancing mortgage may benefit you

Homeowners who financed homes at the top of the hump on the roller-coaster ride of rate trends now can cut their mortgage rates by more than 2 percentage points.

As a result, many people who financed a home when rates were substantially higher should consider refinancing.

“If they can save a point and a half (in interest), it makes financial sense – unless they are going to sell their home in three years,” said Mike Kirch, president of Vegas Valley Mortgage.

Other experts suggest refinancing only if current market rates are 2 percentage points lower than the rate a person is now paying.

Three groups of homeowners should consider refinancing today, says Keith Gumbinger, vice president of HSH Associates of Butler, N.J., a mortgage research firm.

First are those who couldn’t refinance a few years ago when interest rates were low because they had no equity in their homes or because of recent changes in jobs.

Second are those who have adjustable-rate mortgages.

And third are those who waited too long during the last interest-rate dip.

Steve Evans, senior vice president of Bank of America Nevada, recommends homeowners take time for some simple math to evaluate the merits of refinancing.

Ask the Indianapolis Mortgage lender to give you precise numbers or estimate the cost of refinancing. A typical $100,000 mortgage costs around $2,000 to refinance, Evans said.

Calculate the difference between your current interest rate and the rate available on today’s market.

(The Federal Home Loan Mortgage Corp. reported Thursday that 30-year, fixed-rate mortgages averaged 7.02 percent nationally last week, up from 7 percent in the prior week. HSH Associates, however, surveys more lenders and figures the national average is closer to 7.3 percent plus 1.275 in points which are upfront fees charged by some lenders.)

Multiply the difference in percentage rates times the amount outstanding on your mortgage.

Figure the number of years you plan to stay in your current home.

Ask yourself: Can you recover the refinancing costs before you plan to sell? If so, then, refinancing probably will save you money, Evans says.

If your mortgage has a 9 percent rate and you can get one for 7 percent, you will save $2,000 yearly on a $100,000 mortgage, experts say. In other words, you recover the expense of refinancing in one year.

Some lenders will finance closing costs. These lenders typically charge slightly higher interest rates, but a homeowner comes out ahead if he moves and sells after a short period.

The going fixed-rate for no-cost financings is 8 percent, Gumbinger says, and, “At 8 percent, it may not make sense to refinance.”

Not everyone has a fixed-rate mortgage, of course. Many people have adjustable-rate mortgages, which raise or lower rates based on an interest-rate index, or changes in Treasury bills or certificates of deposit.

In some cases, people with adjustable-rate mortgages can now obtain fixed-rate, 15-year or 30-year mortgages for a similar or lower interest rate.

Kirch encourages many to switch from adjustable- to fixed-rate mortgages even though the homeowner may have saved money with an adjustable rate over the last couple of years.

“It’s nice what you saved, but now we’re starting to see another historic low,” Kirch says. “So maybe it’s better to stop shooting craps” on interest rates.

Adjustable rates could boost homeowners monthly payments beyond their financial ability if interest rates spike in the future, he said.

Evans views adjustable-rate mortgages more favorably, noting that most of them have ceilings and, typically, can increase only so fast in a given year.

“We particularly think the adjustable product works for people who are coming into the valley,” Evans says.

Promotional offers typically cut the rate during the initial years of the mortgage and adjust upward thereafter.

Adjustable rates work for young professionals who anticipate their salaries will rise as their careers progress, offsetting increasing monthly payments, Evans says.

“It helps them economize in the first several years of their loan with their payment,” Evans says.

If they find career opportunities in another city in a few years and sell their Las Vegas home, they may never pay the full rate on an adjustable-rate mortgage, he says.

“If you think (the house) is your ultimate, last home and you’re never going to be moving again,” then get a fixed-rate mortgage, Evans says.

Rates quoted on fixed-rate mortgages usually are higher at any given time than comparable adjustable-rate mortgages because the lender takes the interest-rate risk with fixed-rate mortgages.

Some adjustable rates now, however, bear higher interest rates than fixed rates, Gumbinger says. Long-term rates, which govern fixed-rate mortgages, have declined more in recent years than short-term rates, which are used for setting adjustable mortgages.

Fixed-rate mortgages are a much better value today, Gumbinger says.

Gumbinger says adjustable-rate mortgages still make sense for people who expect to sell their homes within two years.

For some, 15-year, fixed-rate mortgages are the best products, Evans says. These mortgages typically bear rates one-half to three-quarters of a point lower than similar 30-year mortgages.

However, a conservative borrower may decide to take a 30-year mortgage and make additional payments to reduce interest costs. If the borrower loses his job or encounters financial difficulty, he can stop making the additional payment, Evans says. The borrower with a 15-year product risks foreclosure if he misses payments.

Kirch says even those paying off mortgages early may benefit from refinancing. Often, he encourages these clients to take advantage of lower rates to change from a 30-year mortgage to a 15-year maturity.

But do you wait for lower rates or lock in the interest rates now?

Kirch suggests homeowners apply for refinancing but delay closing. Borrowers can wait as long as 90 days to close after they are approved.

“We feel extremely positive that rates will continue to drop,” Kirch said. “We have seen the economy trend to be about flat.”

With a flat economy and minimal growth, the Federal Reserve may be inclined to cut interest rates as it did Wednesday. The Fed trimmed the federal funds rate that banks charge each other for overnight loans by one-quarter point to 5.25 percent.

“We don’t expect a whole lot of movement on interest rates between now and the end of the year,” said Cary, who said he believes homeowners will be able to finance a home at approximately the same rate in December that they can get now.

Even if rates do change, Evans figures the gains may be offset by the expense of higher interest rates homeowners pay while waiting for rates to decline.

“It’s better to take the savings,” Evans says. “You won’t miss (the bottom in rates) by much.”

A few other considerations:

– Survey mortgage bankers, mortgage brokers and banks for the best rates. Be suspicious if a lender offers a rate substantially below all others. To protect yourself from bait-and-switch tactics on interest rates, ask for a written statement of the interest rates and points, Gumbinger suggests.

HSH Associates, Gumbinger’s firm, sells surveys, and the R-J also publishes weekly surveys of mortgage rates.

Don’t stop your research with the survey. Call a number of lenders to get a better feel and understanding of the market, Gumbinger says.

– Some people may be able to buy a home for about the same monthly costs they are paying for rent. A 7 percent mortgage loan for $100,000 requires $665 in principal and interest payments monthly, plus about $100 for taxes and insurance, Kirch says.

– Low- to moderate-income people can qualify for lower interest rates, lower down-payment requirements and other benefits through programs at many banks, Evans said.