Loan Readiness

uh it the way that you access interpretation depending on your device is on the slide if you are in a computer you can go in in the at the bottom of the screen and you are going to see a world icon you're going to click there and then you're going to choose your language of preference if you are on a smartphone then you are going to go to the lower right part of your screen you are going to see three dots you are going to click there and you are going to choose a interpretation and then you choose the language of preference [Music] thank you and welcome everyone to the loan readiness workshop federation of working cooperatives wait hold on mark i don't think the interpretation feature is on yet sorry for the delay thank you sorry okay interpretation is turned on great thank you and welcome everyone to the loan readiness workshop of the 2021 us federation of worker cooperatives conference excited to have you here um and uh i want to uh appreciate that you're all uh joining us virtually we're gonna do the best we can here and hopefully everyone has found their interpretation needs already if you have any questions throughout the session please go ahead and enter them into the chat and my co-worker samantha will keep track of them we do uh encourage people to ask questions throughout the workshop and we will pause occasionally to answer them and open up for conversation as needed i want to talk a little bit about who we are both myself and samantha work with shared capital cooperative i am a senior loan officer samantha is a loan officer and shared capital cooperative is a essentially a business loan fund we provide most any kind of business financing for small businesses and mid-size businesses across the united states we are a little bit unique in that we only work with cooperatively owned businesses and that we are structured as a cooperative ourselves and so essentially it is a loan fund that is owned by the cooperatives who invest in our fund and the cooperatives who borrow from our fund we we live out the the democratic principles of of uh of cooperation and bring that to our underwriting standards and our processes and procedures we have about 260 members across the country um right now we have about 100 borrowers in our portfolio of about closer to maybe 17 million right now and a significant portion of our investment like i mentioned comes from the co-ops around the country who have been successful and have built up reserves and want to invest those reserves in the development and expansion and creation of new cooperatives around the country today hopefully you're all here to learn about lending learn about how loan decisions are made and how to prepare yourselves and your cooperative for a loan application and there's a lot that can go into this and so we're gonna spend time digging into some of the details of why lenders ask all of these crazy questions why we we need certain kinds of information to make our decisions and how we make those decisions and hopefully that's what you're here to learn about today and we'll pick up other things along the way if people have more particular questions like i said we're happy to answer them as we move through the presentation i mentioned that we are a cooperative and and that we bring that to our interpretation of of the lending process and the investment process when we put our money into a cooperative we want to make sure that we also are following the cooperative principles and there are a couple of principles that stand out when we are looking at financing and capital and bringing that money to our businesses in particular principle three um acknowledging that the members of a cooperative should invest equitably and and democratically control the capital of their co-op that ties up very well with principle 4 when we think about money and capital coming into our businesses is that co-op should raise capital on terms that ensure member control and autonomy as you may be familiar with it is fairly common in the business financing world outside of cooperatives to hand over a portion of the control or some decision-making authority of your business when you turn to investors and lenders and when people put money into your business they are expecting to take a portion of control we don't think that should be the case we want to make sure that when our money is going into a cooperative business that that co-op maintains control and autonomy and that we step back offer guidance assistance some baseline requirements but that ultimately the control stays with the ownership stays with that cooperative and the members of that cooperative and of course ourselves as a loan fund we embody principle six cooperatives working with other cooperatives to build a stronger economy and so we play that out in that form of taking money from co-ops and reinvesting it back into the cooperative world this we don't have to spend a lot of time on this slide but it's really just to acknowledge that capital is important that money is really important to getting your business up and off the ground and that it is possible and it happens regularly that you can start on a shoestring budget you can scrape together the bits of resources that you have and you may become successful over time but the odds are not in your favor and it will be a very difficult struggle to get to sustainability for your business at some point you really do typically need other outside capital to bring into the business to give yourself enough resource to to grow your business from startup to sustain itself over time it's also a good chance with this slide to remind people that uh it is a common occurrence that a small business that is not cooperatively owned meeting the same challenges that a cooperative business meets will often fail sooner than the cooperative we often see that a co-op when it meets those challenges is able to rally its members bring them together with their combined resources to make it through that challenge but that's not always the case and so there is early on a question of what kind of money do the co-op need where does that money come from and how does that money get used so we're going to talk about different kinds of money for a little bit um there are to simplify a little bit we put them into buckets of equity on the left-hand side and debt on the right-hand side so and those can take different forms those boxes at the top describe some common forms that capital will take as it is coming into your business so again on the left hand side we have grants and donations crowdfunding investments friends and family that may invest in your business with no expectation of returning that money back to them moving to the right we have the common stock that is the member equity in the cooperative members should purchase some amount of stock in their business and that becomes the core capital that the business can start off with in the middle we have something called preferred stock is an outside investment into the cooperative that should expect no returns until the business is successful and can generate enough cash to pay those investors back that tends to be fairly patient hopefully and it can sit and wait until the business has cash but then is often paid out at a higher rate than loans ultimately and then on the right side we have a couple of different forms of debt subordinate loans and senior loans these are both forms of investments that have a fixed rate of return a fixed schedule of payments and typically some kind of lien on the business those these dollars might ultimately be a little bit cheaper than the stock investments um but they can be they can be brought in early on and they have a predictable form of repayment most of what shared capital does is lending and it would fit in that senior loan or subordinate loan box we have a small number of equity investments some in the form of preferred stock are similar and we are growing that uh that program within our organization to meet the need of a diverse number of worker-owned cooperatives who really need equity early on and can't afford to pay back loans from the beginning i'm going to pause here just for a moment and see if there are any questions or comments samantha did you have anything you'd like to add no thanks mark sure so now we're going to add a little bit more to this grid in telling us where we find these different kinds of investments and loans going starting at the top your membership is naturally an early place where you're going to find your investments and members may contribute cash up front they may contribute sweat equity to replace what might need to be paid for otherwise or they and they might and they most likely are going to purchase some form of common stock and members might make loans to the business or purchase preferred shares in that business as well but it is often the case that members of small business don't have enough cash in their pocket to meet the needs of the co-op and so then we have to start looking outside of the business for those investments cdfi and mission-based loan funds are a common source of preferred stock investment and debt for co-ops cdfi stands for community development financial institution and they are a a section of business loan funds across the country that take a lot of different forms and are are mission based and designed to invest in small businesses underserved communities affordable housing and the like not all cdfis unfortunately understand co-op models but there are a growing number of cdfis across the country that are investing in co-ops and that's good groups like shared capital like leaf like the working world like national co-op bank different organizations around the country that have decided to prioritize cooperative investment you can also turn to other cooperatives for grants donations stock investments and subordinate loans it's fairly common to see co-ops invest in other co-ops and as i mentioned before shared capital is a model of that on a larger scale there are times when we make a loan and the co-op needs a little bit more than what we're comfortable lending and we can sometimes turn to other co-ops to guarantee loans or investments into a business and help to fill that gap that's needed moving down we have crowdfunding on the left-hand side usually that takes the form of grants and donations sometimes it takes the form of stock investments moving to the right on that line we have banks and credit unions most banks and credit unions around the united states are not very familiar with cooperative models but there too there are a growing number of them that are getting comfortable with that and can sometimes work alongside a cdfi or mission-based lender in order to meet the needs of a co-op most of the time those banks and credit unions are only going to be able to provide some form of senior debt we have a growing field of impact investors that are interested in investing as equity or debt into co-ops foundations can be a source as well as public subsidy some folks are hesitant to turn to public subsidy with their co-op but from my position um the there are public subsidies both at the city county state and national level that can play a crucial role in helping to fill the gaps and we should use them as long as they're available so what does the co-op actually need there are different needs and those different needs will be filled with different sources of capital um at the top we got working capital what does that mean that means really just the cash that you need to keep the lights on in your business from day to day it's money to pay for rent pay for salaries to pay for just general operating costs of the business not necessarily tied to any particular use but just the day-to-day expenses you may have to purchase inventory and you may borrow or to turn to investment dollars to buy that inventory the same with equipment leasehold improvements real estate and more and more we're seeing business conversions and so the co-op may need to borrow or find investments simply to buy the business that will become the co-op and convert it all of these take different forms and will you'll turn to different sources to find these dollars and and each of them may be structured slightly differently depending on how you're using them and what you need them for excuse me skip the slide so um combining what we saw before with these needs this is a bit of a oversimplification but it helps to map out what kind of money do you think you need for those particular uses for working capital and inventory purchases they are usually short-term loans maybe lines of credit or maybe general equity investments into the business for equipment they also may or lease hold improvements they may also be short-term loans are often tied to the life of the collateral va polls would also sit in this category and other large purchases for the business when it comes to real estate there are some particular elements of real estate financing that usually mean that those loans or investments are going to be longer term mortgages or shorter term construction loans that may convert over to mortgages and then again with a business acquisition or a conversion you will have equity or debt often a combination of those two that will be tied to the profitability and the cash flow of the business so the recalculate how profitable the business will be in the future and and figure out how much of that can be applied towards that debt to buy the business i'm going to pause again and see if anyone has any questions not seeing any i will continue so getting into this question of how do lenders think how do you prepare yourself for that conversation of asking for money well lenders and investors each come from a different context regulated banks have their own set of priorities and rules and regulations cdfis have their own set of priorities and rules and regulations uh credit unions impact investors all of these different sources of capital each have a slightly different way of thinking about where they want to put their money and and and how much risk they want to take um and so what i've got here is kind of the things that will go into the calculation for the lender when they're deciding whether or not to make a loan or whether your request fits their their priorities and these could be the mission of the individual lender or investor it could be where their money comes from if they have short-term money they may make short-term investments it might be local politics that drives a priority of an individual bank or investor and it might be regulation and industry standards ultimately these all define for the lender how much risk are they willing to take on mark yes we have a question in the chat from alyssa it says um how do co-ops that are not non-profits accept grants and donations yes so it's not necessarily easy or straightforward but it can be done so often sometimes well it always depends on who's making the grant or donation so the the thing with nonprofits is that a foundation will make a grant to a 501c3 nonprofit because that is non-taxable and and the they can get their credits at the foundation because it's going into an entity that is non-taxable if you have a taxable entity then they aren't getting that credits and that's not a legitimate investment for them so sometimes a foundation will invest in an entity like a cdfi and that cdfi then will take those funds and make a low interest loan to the cooperative so often there is an intermediary that may have to step in between the foundation or the grantor there are some foundations that are willing to make small grants regardless of the tax status of the cooperative that's not very common but it is but it is out there and that sometimes happens and then sometimes [Music] local groups can come together and and and essentially provide those funds in the form of a grant that isn't coming from a formal foundation or a formal organization so they're um like i said it's not real common but there are occasions when that can happen hoping to ask you one more question here okay great thanks so oops um so what are these lenders thinking like i said it depends on where their money comes from for us our money comes from co-ops so we know that our purpose is to put that money back into cooperatives and what do these lenders what do these investors expect are they expecting a social impact from their investment are they expecting a financial impact from their investments and those may play out in different ways depending on what they prioritize and what they invest in how do they prevent losses and how do they interpret risk this is where we get into the question of what is a risky investment what is not historically the the markers that identify risk in a loan or an investment have not been very accurate and have and have in fact been in some ways very racist in some ways very anti-community building in looking at small community-based businesses as high risk simply because the individuals have poor credit scores and so some lenders and investors using the more traditional markers for risk often look over co-ops because co-ops don't score very well on those things so what we have to do is find lenders like the mission-based lenders we referenced and others who are willing to look at the strength of the cooperative model the strength of the group of individuals and leaders within that business rather than looking at a pure credit score and also lenders and investors want to grow their their business themselves and so do they see you as a possible uh long-term relationship for investment maybe a small loan now and as the business as your co-op grows there's room for another financing relationship later and that can grow over time and again all of these things will feed into what kind of questions they're asking and how they decide and when they decide to invest so looking at the the nuances of underwriting so underwriting is really the process that a lender or investor goes through when they are assessing the strength of your request and the underwriting starts when you first have a conversation and it ends when a decision is made on whether to make a loan or not um throughout that process there are a number of things that most every lender or investor is going to look at those are the seas of credit people talk about cash flow collateral capacity the conditions and the character of the borrower there are also a few things to look at in this underwriting process that are unique to the co-ops questions of ownership and governance and equity and patronage and so any good lender if they understand what they're doing with a co-op is going to look at all of these things together along with the impact of who's owning this business and and what impact will it have in the community let's drill down into each of these a little bit cash flow is the primary source of repayment so you have money coming into your business you pay all of your expenses and how much do you have left at the end of the day that's your cash flow and from what's left at the end of the day you have to pay back your investor or lender and this is measured by something called debt service coverage that's essentially a ratio of how much you have left over to how much you have to pay each month to pay off your loan most lenders want to know in a lot of different areas of underwriting that not only can you meet what you need but you have extra cushion built into your budgets extra cushion built into your assumptions and projections about the business so that when you run into problems and all businesses run into problems at some point that you have some way to absorb those extra costs and you're still able to pay the lender back and so a debt service coverage ratio is a common indicator of the health of the cash flow most folks want to see something like a 1.2 a 1.3 or higher on a debt service coverage ratio what that means is you have 20 or 30 percent more than what you need to pay your loan back each month so if you are borrowing money and you have to pay back a hundred dollars every month the lender wants to know that you have at least 120 or 130 so that you have enough money to pay that loan and still have some extra cushion just in case things don't turn out as you planned different lenders will have different debt service coverage requirements some may be lower some may be higher they may also change depending on whether you're buying real estate or equipment or the other things that we talked about before so it's important to understand what that lender is requiring or expecting and what their thresholds are for these collateral insecurity this is really about answering the question how do you repay the loan if the cash is gone if things turn up short if the business fails or or or it hits a slump and so any any reputable lender any good lender is not in this to take your stuff away they're in this to invest in your business so that you can grow but there are times when the business fails and in that case the lender needs to get their cash back so that they can turn around and invest in the next co-op down the road and that is the secondary source of repayment cash is gone do we need to sell the equipment the inventory the real estate or other assets and and the lender typically wants to know that there's something there beyond just the cash flow so that they can feel more secure in the worst case scenario this also will change depending on what kind of loan you're getting so a real estate loan is going to use that real estate as collateral and most lenders are not going to lend above the value of that real estate but a working capital loan may not necessarily require any collateral at all and there we're really really looking at the cash flow for the repayment how do we measure this we measure this as a loan to value ratio or a coverage ratio and that's the difference between how much is being borrowed and what is the value of any extra security or collateral typically we we will discount the value of your equipment your vehicles your inventory by maybe 75 percent depending on what kind of collateral that is as you might imagine if the collateral is a car that's going to lose value fairly quickly over time if it's equipment that may hold its value for longer if it's a grocery store and the collateral is the food on the shelves some of that is going to not be worth anything after a week or two some of it will maintain its value over time do we have a question no mark we don't have a question um i do want to mention one additional thing on the collateral insecurity uh you might have been about to go into this but shared capital as a cooperative friendly lender who understands shared ownership does not make use of personal guarantees in our lending process and so when we talk about collateral and security we're talking about the collateral of the cooperative not your personal collateral like your personal home or your personal vehicle thanks for clarifying yes um it's our intention to not leave people worse off than they were to begin with and so yes while we do need collateral and we need to collect that to try to pay down the loan in a worst-case scenario we don't go after people's personal property that's uh that doesn't fit with our mission and it leaves people in a bad situation and it is in fact one of the ways in which lending and investing has been very extractive over time there are there have been historically and there continue to be many investors and lenders who will make bad loans knowing that at the end of the day the borrower will fail and they will take everything they own that's not uh that's that's not a form of business that we espouse or support and in fact we work alongside other co-op lenders to create new standards around around focusing on the strength of the business and the cooperative rather than than just taking money and leaving people behind capacity there's a few different ways to measure capacity ultimately it's this question of can you get it done so we're looking at the people in the group um are the right people doing the right jobs do you have the right experience among the group of people the members of the cooperative is there a need for outside assistance this of course can vary a lot depending on the nature of the business if we're making a loan to an engineering firm we're going to want to know that the members have legitimate engineering experience have the education they need have the experience that they need to bring that to the cooperative business in other situations it may be a business where people can really learn their skills on the job and in that case we're going to want to know that there is a system in place in the co-op to help train people into those skills and become experienced and build that capacity it's really common that not all the skill sets that are needed in a small start-up business are are are available among the group in the that is the membership and so it's not a problem to seek outside assistance as a lender we just want to know where those gaps are where those weaknesses are and work together to figure out how we can fill those gaps whether it's consulting technical assistance services or other partnerships that might help that business fill those those capacity gaps there's also a sense of financial capacity and this is a little bit like what i talked about before of having extra gaps and questions in your financial projections some of them may be reserves it's good to have some extra cash in a savings account for the business to draw on when you meet hard times we we want to know that you have the ability to track your dollars accurately that you have the systems in place and the monitoring and the ability to report on those financials we require regular financial reporting so that we can see how a business is doing but it is even more important that you're able to share that information with your membership because the co-op members all of the co-op members should understand how their co-op is doing financially and we want to see some member investment in the co-op that may vary a lot depending on who the members are and what kind of a business we're looking at and again that member investment can take the form of purchasing a share and also providing sweat equity and just taking on those leadership roles in the business but it helps us a lot if we can figure out early on where those challenges might be um not to not to turn around and say no we aren't going to make a loan but we want to find those challenges so that we can address them and build a stronger business and a stronger co-op as you take on the debt character so usually the character underwriting in a small business is looking at one or two of the primary business owners and the rest of the employees don't know that much to a lender in our situation we're looking at the character of the cooperative as a whole and that's made up of looking at how do the members work together how do they re address conflicts and challenges how do they make decisions as a group and they and and how do they build trust as an organization if you have a larger business where you may have uh frontline workers and management employees and a board of directors we want to know how those different layers communicate with each other and is everyone on the same page create a strong cooperative so there's different ways to think about what character is but this ties in for us into the health of the cooperative itself as a group of individuals again because we as a lender are not relying on one or two people to pay back this loan we're relying on the entire group of people working together to pay back and mark this might be a good place to add that similar to the fact we do not make use of personal guarantees we also do not measure character through financial background checks or personal background checks again in an effort to decrease barriers to accessing capital yes indeed um credit scores are not a useful number to us um credit scores will tell us um problems that people have had but they won't tell us how they've dealt with those problems and so we might look at your if it's a small group and it's a startup we might look at your personal financials only to understand you've if you've met some roadblocks how did you deal with that and how did you get through that but the credit score itself is not helpful we found in in helping us to decide whether a loan is risky or not and there are conditions so for this it's really about the conditions around the business and a big part of this is knowing your market who are your customers or your clients or the people that are going to pay you for your services we do appreciate market studies and there are times certain certain kind of sectors where we will require a market study for a larger grocery store a large retail business we may want to really understand the local market and the competition in a formal market study but it is more common and more often that we take um a different version of a market study and and it can be formatted in most any way as long as it's helping us to answer the question what is your competition um and how does your product or service fit into that local market why should anyone buy your products versus the products that are already out there what is your essentially your your value added to the local market it's also very important especially in certain sectors to understand what's going on in the industry as a whole there are certain sectors like groceries like taxi businesses even in a lot of retail businesses that have moved online or to virtual uh base businesses that have transformed those industries over the last 10 20 years and it's really important to make sure that the business that we're lending to understands how those shifts are happening in their market and how they will survive those shifts over time so um then we get to some of the issues that are unique to cooperatives ownership of course as the members you own this but is it is it transparent is it written down is it clear how does someone become an owner and what are the rates and responsibilities of owners so digging into that is important for us we want to know that it truly is a cooperative we occasionally get requests from groups that may just be one or two individuals that would like to form a co-op but for us we define a co-op as at least three individuals who have come together to form their business and so and there are also a lot of a lot of folks that come to us that sort of think they're a co-op but they're not really a co-op and that's a chance for us to understand what does ownership mean and and and is it really an equitable structure that allows for a democratically run business and and we're happy to see that there are a lot of variations on cooperative structures that have developed over the years as people enter different sectors and we work with a lot of different variations on cooperative structures so we're not afraid of unique approaches to cooperative ownership or or new variations of how membership and ownership works but fundamentally we need to know that the owners own control and benefit from the business itself we're going to find these things in your bylaws and your articles or perhaps in your operating agreements where we'll find the information about what what membership means for this business for governance do you have clear and established policies how are decisions made in the organization what kinds of decisions are made at the board level or the management level or or frontline worker level or what kinds of decisions are brought to the entire membership as a whole again we don't require or prescribe necessarily a fixed approach to these questions we want to know that the co-op members have have uh have worked through these questions and have figured these things out for themselves and there are best practices out there but again there are sometimes creative ways to approach this and we welcome that we just want to know that you've thought through some of these issues and then equity and patronage and and here we're talking about equity uh with regard to financial investment in the co-op so the equity that the members purchase when they buy a share how is the value of a member share determined for a very small worker co-op you may purchase a share for 100 or 200 or even less for a very large uh professional co-op that generates a lot of cash and has higher capital needs shares may be 10 or 15 000 either of those are legitimate we just want to make sure that it makes sense for your target audience for the membership that you want to develop and and the business itself often uh people ask well how small can the member share be um there's no precise answer for that but i often say that it should be a meaningful amount so depending on who your members are if they don't have very much cash you may want it to be more than the cup of price of a cup of coffee because it's something that people can easily just kind of walk away from you want people to commit a little bit and and acknowledge that they're really investing a little bit of what they have into the business do those shares values change over time how are they paid out to members as members come and go and ultimately uh hopefully the business creates surplus and profit and then how is that surplus and profit allocated it might be held at the co-op it might be it might be retained by the co-op for operations it might be invested it might be passed through to the members with patronage dividends it might be allocated towards the members but held at the co-op in internal capital accounts there are a lot of ways you can use the surplus of the business and there too we aren't going to tell you exactly what you need to do but we want to know that you've thought through it and you've thought about what your answers are going to be to those questions so we think we need some money where do we start this is ultimately a relationship between a lender an investor and the co-op itself we want to make sure like i said at the very beginning that the co-op is in control but the lender and investor is an important resource for the co-op and that can be a long-term resource if that if you build a strong relationship with those lenders and investors and so both parties the borrower and the lender need to understand who each other are and understand the interests and motivations of the other party and so the sooner you can figure some of that out the sooner you will be able to craft your messaging your request for financing in an appropriate way for them and hopefully they can communicate what they need to see in their requirements as an investor into your business get all your ducks in a row so this is this is getting to you know becoming familiar with your financials not everybody in your co-op needs to know how to run the spreadsheets not everybody in your co-op needs to be an expert in numbers and finance but you want to have some basic familiarity with what's going on in your business you of course want to show the lender that you can pay back the loan on a reasonable timeline while sustaining your business but it's important that as broad as possible among the membership that people have some familiarity with the financial position of the business and this comes down to finding those couple of people those one or two people that really are comfortable and familiar with numbers and their ability to translate that to the broader membership explain to the broader membership how money is moving through the business and feel confident that that everyone at least has a baseline knowledge of how it's going so identify your why and how this gets to some of what we talked about in the market and the the the conditions uh underwriting question again what group of people are do you aim to serve or to sell to or to provide your resources to how do you provide them value in that process and why is your business the best way to do that we do you know from time to time get a co-op that comes to us and say well just because we're a co-op people are going to come and buy our product or eat our food or use our services and it is true to some degree that there are a lot of people out there that that shop with their values and choose locally based businesses choose cooperatively owned businesses over other options when they have competing options but i it's very rare that a co-op can fully rely on those folks to sustain their business you really do need to provide a valuable product that people can differentiate from the competitors and and and understand why they're going to choose you versus versus those competitors and just being a co-op is not going to be enough you have to go above and beyond and you really do have to compete in figuring out how you compete against those other businesses in your marketplace except in the circumstance where there you may be a new product a new service in a market and there are no competitors that's fairly rare um but even then you can't uh rest on your laurels and simply operate because you're a co-op and and provide poor quality services you really do need to make sure that you're you're able to compete outside of the the notion of being a cooperative and ultimately be prepared for change things are going to change all the time and so the more you understand your core identity and the core elements of your business the more you can weather changes around you be they environmental political economic social and other its co-ops can be fairly nimble at times and adjust at times and some co-ops are about have a difficult time with that because they've chosen a an identity that won't adjust as the world around them changes so think about how you can build and project as and predict as best you can but also how you might adjust as things change around you we often take calls from people who are at the very early stages of building their business and we are happy to take those calls and offer feedback and think through how that business might be established and grow over time but it's fairly common that after that initial call a few months later another conversation happens and things have changed and that's okay we're not scared of change um and in fact when you start to create your budgets and your projections financially those are also going to be living documents until it is all said and done and that's okay as well and if you've made some mistakes in the process early on it also is okay because everyone makes mistakes and we they the lesson is more about how we address those mistakes how we move past them not the fact that we made a mistake early on so preparing for change is is always important in any endeavor but especially so if people are putting their their personal sweat equity their time they're putting their personal resources into this business we want to make sure it can respond to the world around him i want to thank our sponsors here for putting this co-op week together and all the great workshops that we've had please reach out to all of these folks as best you can when you have an opportunity to thank them for supporting this workshop and all of the others so we've got ended a little bit earlier than i expected but um we have plenty of time for questions and conversation people want to talk a little bit about all of these things that we brought up yeah and before we jump into q a virginia in the chat also elevated leaf fund one of our close partners so please consider them as well for your financing needs you're in new england you should talk to the cooperative fund of new england there are a lot of good uh small and mid-sized lenders around the country we all generally work together as best we can depending on the geography and the type of business being served but it is helpful that in the world of financing cooperatives um for the most part the co-op lenders all can find a way to work together and cooperate to get the money that is needed um and mark uh first question from nathan can you talk about the difference between subordinate and senior loans yes so that is in reference to both a claim on the collateral and a claim on the monthly debt service or the monthly payments and typically a senior debt provider a senior loan has a priority lien on the collateral and a priority lien on the debt service so if cash is tight and the borrower can only make can only pay one lender and can't pay everybody the senior lender gets paid first and the subordinate lender gets paid second and similarly if things work out in a worst case scenario and the business has to close and people are going the the lenders are going to sell off equipment or inventory to pay down that debt the senior lender gets to step in first and collect to pay down all of their debt and a subordinate lender will then have to wait until the senior lender is done to see if there's anything left and the second question from nathan mark is can you give some examples of the differences in interest rates between preferred stock and subordinate or senior loans that will vary a lot depending on the investor depending on the nature of the investment but it's just it's generally a rule of thumb that a so for us for example we make loans uh with interest rates uh depending on the program again and the nature of the loan could be anywhere from four and a half percent to nine percent and and so anywhere in that range most of what we lend is somewhere between six and seven and a half usually and and um an equity investor might end up getting paid slightly better than that because they can go in with their money and let it sit with the business for a longer period of time and they're essentially because they're patient and they have to wait until the borrower is profitable to get paid back um they they take a slightly larger percent return on that that's not always the case you may sometimes find uh equity investors who take a lower rate but it is fairly common to for an equity investor to take a slightly higher rate because of their additional risk and waiting longer before they get repaid also some equity investments take a percentage of profits and so it's not so much about an interest rate but if the co-op is modestly profitable that equity investor will get a modest return on their money and if the co-op is wildly profitable that equity investor will get a very large return on their investment so there are a number of variables that can go in to defining those returns and on a related note nathan some common practice for shared capital when we have preferred stock if we're if we're the senior lender we would say for the term of our loan typically a five-year term that you ca the co-op can't pay out principal or interest to um preferred stockholders we can make exceptions to that if the co-op does do very well the co-op could reach out to ask us to allow them to say pay some interest but typically we're we're seeing that uh preferred stockholders are not allowed any principal or interest during the term of our loan so that can also affect the interest rate that they might be seeking um mark there's another question from mel they'd like to know if there's a different process for startup loans and what does it look like the process is the same and the things that we're underwriting are going to be very similar but for a startup we may put some extra belts and suspenders on a loan and that may mean that instead of uh handing out the entirety of the loan when the on day one we may allow you to access a chunk of money first and once you've accomplished a certain number of things then the next minute another tranche of money is available and you accomplish a few more things meet some goals and then the rest of the money is available so there may be a more caution in how the money is is put out there um and of course we don't have as much history to to rely on like an existing business we can look at their past performance to try to understand how the future might work for them with a startup then we're going to be extra careful in digging into the market assumptions and the projections and we might take your numbers and really cut them back to assume worst case scenario and see how does this business do if things do not play out as planned we have had startup businesses that really meet their goals fairly concisely and predictably we have had start-up businesses that that shoot it out of the park and and do very well and we've also had startup businesses that fail almost immediately once they open their doors we of course want to be a little more conservative in how we're looking what numbers we're looking at and we may also want to have extra assurances or guarantees from other partners along the way so you might turn to another co-op or another entity to provide a secondary guarantee to the lender to to make us feel comfortable with that we work with startups on a regular basis so we're not at all afraid of that but there are a few extra things we might look at in the process not seeing any other questions in the chat okay and so thank everyone so much for attending today um like mark said we talk to groups early and often and so maybe mark you can go back to our contact info please reach out to either of us and we'll get a call scheduled you can also go on our website and access the calendly where you can schedule yourself with us um yeah any closing remarks mark no thanks everybody for joining us today um and uh thanks uh teresa for the shout out in the chat and uh look forward to talking with any of you along the way yes this presentation was recorded and it will be shared