DIFFERENT MONEY IN DIFFERENT BUCKETS – PART 4 – BANKS
Karl Dakin
I help you overcome challenges to raising capital. Take advantage of my Motivated Money Method to identify those investor candidates that are most likely to invest. Top expert in fundraising.
QUICK CALENDAR
July 8 – Don Cohen Show – 9 a.m., MDT – LinkedIn Live
July 9 – Successful Funding Show – 8 a.m., MDT – LinkedIn Live, Facebook and YouTube
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?FUNDING POINT – DIFFERENT MONEY IN DIFFERENT BUCKETS – PART 4 – BANKS
?In consideration of the multitude of possible funding sources for a community investment fund, one of two common targets is a bank. Banks may provide debt financing under limited conditions. They have a zero risk tolerance as mandated by federal law and regulations to protect their depositors – like you and me.
?Everyone knows at least one bank that helps manage their money. A bank provides a multitude of services? that may include:
·?????? Holding bank accounts from which payments can be made and received
·?????? Holding savings accounts, which are a form of investment where the bank pays interest on the balance of the account, like a loan
·?????? Manage payment processing (credit cards, wire transfers, and ACH transfers)
·?????? Providing investment advice
·?????? Making loans
Banks come in different flavors: ordinary banks, commercial banks, private banks, etc. The services they offer vary significantly.
?All investors are making investments in their self-interest. Banks are no different. They provide services to earn fees and lend money to earn interest. Government regulations will help and hinder those who may receive services or loans.
?Federally chartered banks, governed by the Federal Deposit Insurance Corporation, are mandated to provide lending within the communities they service under the Community Reinvestment Act. They are audited every three years to verify that some of the money that is placed through loans is benefiting these communities.
?As previously stated and emphasized here, federally chartered banks are not allowed to take risks. A private bank or other types of lending institutions do not have high restrictions and may be a source of financing when turned down by a public bank.
?When seeking a loan, a bank may zero out its risk by having the borrower's assets used as collateral to securitize the loan. In the event of default, the collateral may be sold, and the proceeds may be applied to pay off the loan and any associated costs incurred by the bank in foreclosure. The difficulty of selling an asset at full market value and the associated costs will cause a bank to require collateral of substantially higher value than the amount of the loan.
?Banks must complete. Interest rates are driven by market forces and federal monetary policy. The increase in bank interest rates over the last two years is the result of the United States government trying to reduce inflation. Otherwise, banks pretty much charge the same levels of interest for the same types of loans with equivalent levels of risk. The ‘prime rate’ represents the lowest interest rate that a bank currently charges to its best customers who represent the lowest risk of default.
?RCI plans to raise funding in four stages:
· Seed Funding – high-risk funding to design and raise funding for a first-of-kind fund with a newly organized management team that will be expended quickly toward a Regulation CF capital campaign where the money may be paid back.
·?????? Community Investment Fund – a pooling of money from many investors toward the goal of causing revitalization of an underserved community in a manner that will create momentum for future economic growth that will take one year to invest and five years to work until investors may be paid back with both an appreciation of their investment and noteworthy and measurable impact.
·?????? Real Estate -construction lending (short term) and mortgage lending (long term) that will leverage down payment money from the Fund financing, increasing the size and number of real estate investments.
·?????? Business – equity ownership or revenue shares that multiply the investment from the Fund to grow existing businesses within the community and to recruit strategic businesses into the community
·?????? Programs and Projects – a cafeteria of several types of funding that match with one of the other types of funding or change the quality of the opportunity to qualify for other types of funding for purposes like workforce training, certifications, special applications, or other outcomes.
?A bank will not make an investment by lending Seed Funding to RCI. Despite the market need, the great management team, and the significant market impact, there are simply too many ‘new’ things (business entity, formation of management team, development of new community investment fund model) to enable RCI to declare its status risk-free. A workaround may be for an RCI team member to borrow money personally and re-lend it to RCI, provided that that person has sufficient collateral to support such a loan.
?A bank will not make an investment in the community investment fund for the reasons stated above and the probability that the investment offer of the community investment fund will not be a loan, but in the form of equity ownership and/or a sharing of revenue.
?A bank is a likely candidate to provide construction financing and mortgage lending to the Fund to leverage the cash downpayment made by the Fund in the purchase and building or the reconstruction of a building. The amount of financing stated as a reference of ‘debt to equity ratio’ will be limited. A bank may loan one dollar for every dollar invested by the Fund (1 to 1 ratio) or it may loan up to 5 dollars for every dollar invested by the Fund. A higher lending ratio would be based upon the anticipation that the real estate will go up substantially in value through work on the building. The ratio may be even higher if the Fund demonstrates that it has future tenants committed to paying rents with full occupancy. The loan by a bank to the Fund will likely be guaranteed by a federal, state or local program thereby enabling the bank to shift any risk of default to the government. If the loan qualifies under the Community Reinvestment Act, the Fund may receive a lower interest rate and more favorable lending terms.
A bank may also lend money to a business in which the Fund invests. In this case, the loan will be independent of the Fund’s investment, standing alone, but the Fund’s investment may improve the credit rating of the business or be treated like a downpayment by the business.
?A bank may provide debt financing at a price of money lower than all other funding options. For this reason, every dollar invested by the Fund will take into consideration the possibility of obtaining a bank loan now or at a later time.
?Like any investor candidate, a pitch of a request for a bank loan should consider how the success of the borrowing may positively impact the bank. Pitches that show how the bank may earn more fees and reduce risks will stand a higher probability of loan approval.
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SUCCESSFUL FUNDING
NEXT WEEK, TUESDAY, JULY 9, my guest on the Successful Funding show will again be Jeff Dangremond. As a wealth advisor, he guides his clients in making impact investments. We will discuss investing in communities.
YESTERDAY, my guest on the Successful Funding show was Eric Hanson. Eric and I discussed investing in communities. He shared the story of an Expo held in the city of Spokane, Washington, in 1974. Starting with a big idea, city leaders advanced the idea into a series of major actions resulting in relocating the railyards, recruiting Ford Motor as an anchor tenant, and turning skepticism into hope. Each major participant worked cooperatively because they had their own self-interest to benefit. They brought over 6 million visitors to a city with a population of 115,000. What a success!
You may see a recording of the show at:
You can see all of my shows at the time of broadcast or recordings of past shows at my profile on LinkedIn.
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DON COHEN SHOW
I was a guest on Don Cohen’s show this morning, July 3. Don and I talked about ‘financing.’ The conversation touched on several challenges, common mistakes, and best practices.
You may see a recording of today’s show at:
I was also a guest on Don’s show on Monday, where we talked about ‘community fund.’ We explored the complexity of investing in a bundle of real estate and local businesses with the goal of catalyzing an economic turnaround and establishing a growing, evergreen source of funding.
You may see a recording of Monday’s show at:
Don is an expert on LinkedIn, particularly on the use of Live streaming to build brands and communities. We will discuss using LinkedIn as a social media platform for building communities that support raising funding.
All shows where I have been a guest can be viewed on Don Cohen's LinkedIn page under Posts.
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Karl Dakin, the Capital Coach
Dakin Capital LLC
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I help you overcome challenges to raising capital. Take advantage of my Motivated Money Method to identify those investor candidates that are most likely to invest. Top expert in fundraising.
4 个月How may a bank benefit from the success of a small business other than earning interest on a loan?