Hall of FAME | Demand for the Finance Authority of Maine's services is already outpacing all of 2008
As banks strive to get the word out that money is available to lend, the Finance Authority of Maine is “straight out busy,” according to Beth Bordowitz, its acting CEO. The following is an edited transcript of an interview with Bordowitz; Charlie Emmons, senior commercial loan officer; and Bob Corey, senior credit officer, about the booming demand at FAME.
Mainebiz: What kind of increase have you seen?
Bordowitz: To give some comparison of the numbers for our loan insurance in fiscal year 2008, we run on a July 1 to June 30 fiscal year, we had 255 applications and we provided insurance on just over $22 million in loans. And this year to date, we still have several months left in our fiscal year, we’ve got 203 applications already.
Corey: We’ve closed $16.5 million.
Bordowitz: So we are closing in rapidly on what we did last year already and that’s just commercial loan insurance. On the economic recovery loans we’re way ahead, those are our direct loans. So the commercial loan insurance is when we insure a bank loan and with the direct loans, in fiscal year 2008, we did 21 loans for $3.8 million. Already this year, we’re at 24 loans closed at $4.7 million. And those applications are coming in at least $1 million a month. We’ve already actually had $1 million in applications for the month of March. We’ve got applications totaling over $1.2 million just [in March], so it’s not stopping. We’ve seen an increase on the loan insurance, those are coming in at a faster rate than they have in the past, which is good, the banks are using us. They need to look at their different credit criteria, and collateral values are decreasing just because the market values are decreasing, and so the banks are using our loan insurance more and they’re using it effectively. But we’re also seeing that the direct loan folks come to us or the banks looking to us to work with them to make a deal work. The economic recovery loan might be a part of a bigger package with a bank.
Why are people not turning to banks but they are going to FAME?
Bordowitz: [Applicants] have to show us that they have no other access to capital. I think they are going to banks, the banks do have money, but it’s harder to show collateral value and it’s harder to show cash flow in this economic environment. So I think loans that might have been done a few years ago aren’t being done by banks, but they do in fact have money to lend so we certainly encourage people to go to their banks first.
Emmons: In conjunction with the Department of Economic and Community Development and the SBA and other agencies like ours, we’re going to be giving a series of eight around-the-state seminars on money that’s out there to lend.
What are you hearing from business owners about the lending climate right now? Are they feeling like they’re at their wits’ end?
Bordowitz: It depends on the business owner. It’s fair to say some may be at their wits’ end; I think it’s hard and I think they’re struggling. Others who have run their business in a fairly conservative way are finding ways to get through. The banks are willing to work with their customers. We did a program with lobstermen when the price of lobster took a precipitous dive in the fall. We put together a program and we couldn’t do that alone, given the type of volume that we would be looking at, but the banks really stepped up. They worked with their customers to find a way to take their existing [loan] and perhaps rewrite it, to extend it, to reduce interest rates depending on everyone’s unique situation and they worked with us, so we were able to put loan insurance on some of those deals to help the banks get that done.
What about new customers who don’t have an existing relationship with a bank?
Bordowitz: It is hard times and you need to show that you have a business plan that is going to work and that’s always difficult with a startup. Although, what we find is it’s usually this kind of economic climate that brings out a lot of the creativity.
Emmons: When I get a call like that, “I’ve got a business to start up, what can you do to help me?” the first thing I refer them to is a bank. The bank should be the relationship financial institution in a company’s life, not FAME. FAME’s a bridge finance vehicle. Basically, our terms are five-year terms and so I keep guiding people, start with your bank. You need a business plan, and that usually scares folks, but there are small business development centers around the state of Maine offering free counseling to, on a one-on-one basis in a confidential way, anybody who wants to work on a business plan.
Corey: What FAME is very good at is bringing in the other agencies, state agencies, federal agencies, programs that are out there, and we work together and try to put these things together.
If the banks have money to lend, then why have you seen such an uptick in requests for your services? Is it because the banks want a little extra insurance?
Bordowitz: I think there’s that. I think the banks want a little extra insurance. I think again, they have money to lend but they also have rules they have to follow in terms of loan-to-value ratios and debt service. They all have their criteria for that, and some of that’s set by the FDIC or whoever their overseeing regulatory body is, and so with collateral value going down, a business that might have had a fully secured loan on the bank’s books six months ago might now find that mortgage doesn’t fully cover the value. So when they go back to get their new line of credit, all of a sudden there’s a collateral shortfall. That makes it a lot harder for the banks because they’re being watched pretty carefully right now.
What are people using the loans for?
Bordowitz: It’s everything, but what we’re seeing a lot of right now is just cash flow that people expected to have, working capital. Those are frankly hard loans for us to do because you’re [building] a bridge to we-don’t-know-exactly-where right now.
Emmons: Especially coming into springtime, some of the companies need startup money just to get going. It could be a seasonal business and so it’s now time for them to put together their lines to start up.
Are there any ways that FAME has adapted to this downturn that are unique to this period in time?
Bordowitz: One of the things that’s always interesting about FAME is we’re very countercyclical. So when times are good, the banks are loaning without us because we become a competitive point in a transaction. We charge for our loan insurance so a bank who wants the deal might say, “Well, I’ll do it without FAME.” I think it’s fair to say our risk changes a bit and we might be taking on loans that are a bit risky now, with a different credit profile than we might in a better environment, in part because that’s what’s coming to us. It’s somewhat ironic because actually oftentimes in a really bad economic climate we also see this, we actually take on a better risk profile because the banks are bringing us deals they would have done on their own otherwise. So we’re constantly adjusting how we operate to take into account the market, but in some ways this is not very different than it was in ’92 or ’94 and the early 2000s. This is deeper and longer, but most of us have been here before.
Emmons: I have rarely been with an organization that can react, if there’s an issue, as quickly as FAME can with its existing programs.
What kind of business makes an ideal FAME client right now?
Bordowitz: We run the gamut. We’ve been doing loans at this point from $12,000 for a lobsterman to start up for the spring, some fairly simple ones, to half a million dollars for a Wahlco or a Tex Tech. I don’t know that there’s an ideal customer, every customer is different and has different needs. If I was Bob [Corey], who does the credit, I would say the ideal customer probably is someone who comes in with a very thought-out business plan and their financial projections in order and can explain how they’re going to repay the loan and where the collateral is to pay it back. What the lender cares about is that they’re going to get their money back in the end, and we have a slightly different take on that, but it certainly makes our job easier if that all comes through the door in a nice neat package.
Emmons: The only thing I would add is public benefit. We do look at public benefit a little differently than I’ve ever looked at it before and that’s extremely important. It’s either the creation or the retention of jobs.
Corey: To me, an ideal customer for FAME is just someone we can help to continue operations and to be a viable product for Maine in the coming future.
Bordowitz: The viability, especially in this environment, has to be part of our analysis.
What has been the effect of the stimulus package on FAME’s lending? Is it helping to loosen up credit on the bank side, which then trickles down to you?
Bordowitz: That would be about it. We’re working closely with the SBA to understand some of the stimulus proposals in the [American Recovery and Reinvestment Act] that provide changes to the SBA programs. There’s reduction in some of their fees and an effort to loosen up funds to be able to fund some of their 504 and 7A programs, and so we’re working with them to make sure that we understand their tools so we can identify them for Maine businesses as they become available. [USDA] Rural Development also is going to get some funds so we’re staying on top of those funds as they become available. A lot of the funds for businesses, the rules, frankly, are just not in place yet.
Have you always worked this closely with banks or has this economic climate changed your relationships?
Bordowitz: Our core product is the loan insurance, so that’s always been a bank-based product. I think we have made, over the past several years even before this economic downturn, a real specific effort to work very closely with the banks to make sure that our products are meeting their needs, that we’re being helpful to them. That we’re providing a service that’s good for them because what’s good for them is going to be good for the businesses they serve. So we work with our lenders, we have a lenders advisory committee that meets quarterly to talk about the environment and whether our products are meeting the needs and whatever else may come up. For instance, one of the things that we did two years ago was create an online application product. Banks using that product can apply online and have an answer instantly about whether we’re going to do loan insurance ... it’s an immediate answer and many banks really like that product. It meets the need for them to be able to help their customer very quickly and get the coverage that they need to be able to close the loan.
Anything you’d like to add?
Bordowitz: Sometimes I think FAME is seen as doing the big deals that get a lot more press coverage, and our average loan this year is $130,000 on our commercial loan insurance. It’s more typical for us to do smaller loans. People don’t hear about it so we definitely encourage folks who might be thinking, “I’m not going to go to FAME, they only [fund] paper companies,” that they should come through the door. They can use our assistance.
Jackie Farwell, Mainebiz staff reporter, can be reached at jfarwell@mainebiz.biz.
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