It’s Not the What, it’s the Who: Credit is #1 Dwight Galloway, CLP RLC Funding

1. It’s Not the What, it’s the Who: Credit is #1Dwight Galloway, CLPRLC Funding

2. “To be or not to be (a lessor), that is the question” Hamlet Act 3 Scene 1 Shakespeare

3. “Whether ’tis nobler in the mind to sufferThe slings and arrows of outrageous fortune (being ‘just’ a broker),Or to take arms against a sea of troubles,And by opposing end them?” (by becoming a lessor)

4. “Thus conscience (worry about the unknown) does make cowards of us all”

5. Avoid the Bard’s 400 year old dilemma with NEFA’s knowledge so you can decide whether “to be or not to be” (a lessor)

6. Credit is #1 • Judging credit is the most important consideration in becoming a lessor • Rather than just finding an appropriate funder, you must make a credit decision • Greatest difference: knowing the risk Your knowledge of the lessee is key

7. Why you need this information • If you are the lessor for only one minute, you have much greater risk than as a broker • Credit will ALWAYS be THE issue in leasing • You will be a start-up in a difficult business; thus are likely to fail It’s your money, your life, your bankruptcy

8. Why listen to me • Started from zero as a lessor-idiot, made all decisions, held all my deals, PG’d bank lines • 27 years as a lessor holding every deal • $5 Billion in applications; 200,000 decisions • $2.4 Billion funded; 100,000 deals collected • Watched hundreds of lessors struggle • Survived through good times and bad Old enough to have made every mistake

9. What you will hear today • Understanding of credit risk • Which questions to ask yourself • How to evaluate your capabilities • What resources and tools you will need • Where to go for help • What harsh facts you’ll eventually learn How to look DEEP into your credits

10. Understanding of credit risk • Static pool history: amount/timing of losses • Unique curves by industry, credit type • Unique curves by application of standards • Net after charge off profitability; loss reserves • Accurate estimate of future losses in order to set rates, satisfy your bankers, survive You must know your future performance NOW

11. Charge-offs: the 500 pound gorilla Applications 100 $2,500,000 Approvals 60 $1,550,000 Fundings (80%) 50 $1,250,000 Eventual charge-offs: 5% (2.5 of the 50) 1 more mistake out of 100 apps = Breakeven 2 more mistakes out of 100 apps = Bankruptcy

12. Static Pool Loss Curve

13. Timing of Losses • Through 12 months you lose 20% • Through 18 months you lose 45% • Through 24 months you lose 60% • Through 36 months you lose 85% • Through 48 months you lose 90% *As % of static pool loss number

14. Static Pool to Annual Loss % Gross static pool chg-off 5.00% Less: Recovery - .80% Plus: Expense to recover +.20% Net static pool loss 4.40% Weighted Avg Life (54 mos terms) 2.50 years Annualized loss: 1.75% per year

15. Which questions to ask yourself • Will you have the funding necessary to hold leases (25 x monthly production) • What range of credit will your marketing provide • What credit range do you want to produce: (B and high margins or A with low margins) • Will you have the personnel resources: (credit, doc, acct, service and collections) Will you have the cash to survive charge offs?

16. How to evaluate your capabilities • Are you really a long term risk taker/holder • Can you do this and not let it impact your life • Can you afford to ignore the other parts of your business (credit risk will dominate) • How much credit decision making have you REALLY done • Will every employee be as careful as you Do you/they have the discipline to follow your credit policy every minute of every day?

17. What resources/tools you’ll need • Policies and procedures (credit/funding/ documents/acct/ servicing/collections) • All bureaus, D&B, Paynet, accounting software, F/S underwriting tools • History, history, history (knowledge) Money, money, money: no up-front net cash flow and you will need equity with your lenders as well as cash reserves

18. Where to go for help • Funding sources publish credit outlines • History of your portfolios with funders • Every class/training you can take • Personal visit to your funders • Every lessor you know (group therapy) • Your clergy, your dog, or preferred bartender Not one person who held 3 deals

19. What harsh facts you will learn (while making your credit decisions) • You will learn more about leasing than you ever wanted to know • You will want to know much more about each deal than ever before • You will become an expert in the specific industries you and your vendors serve Random charge offs and economic down turns will come--and always at the worst time

20. Other facts you will learn • You will not have cash flow for a long time • You will need a significant real cash reserve to satisfy your bank (and yourself) • If your funders don’t want it, don’t take it • If you depend on others (outside or inside), they may leave at the worst moment You will retain the liability for 5 years after…

21. How to look DEEP into credits • Identify the owners and decision makers • Learn the history of the owners/business • Establish the “time in business” • Understand exactly what the lessee will be doing with this equipment • Understand the industry and its quirks • Relate to the economy and industry future • See any financing they have done, are doing

22. How to look DEEP into credits • Is this an expansion, addition or relocation • Why now (if this is not replacement equip) • Will this earn or save money; is it vital • Does the deal fit all your business and credit parameters • Can you sell it if/when you must • Vendor relationship and delivery issues Does it all make sense?

23. CBR’s: Ignore the score! • Review the heading: in file date, age, location, address, employment • Mortgages; amount, history, timing, Zillow • Credit cards; amount, available, use, age • Revolving, installment • Total experience and performance • Inquiries; who, when and for what • Compare more than one bureau When in doubt, round the “score” down

24. Financials and tax returns • Get them when you can, verify sources • Learn the basics • Industry variations can be significant • The last few years will not look good • T/Rs must be precisely done and rarely is the income exaggerated How well the reports are done is an indication of how the business is run

25. Other sources of information • All internet searches for firm and PGs including Google, maps, Facebook, Linkedin, telephone look-ups, etc. • D&B, Paynet, SOS, BBB, industry listings, licensing verification, county clerks • Bank reference/statements • Sources of inquiries (call your funders) • Call the business as a customer Get anything you can, any (legal) way

26. Vendor/equipment information • Has the lessee had one like it before • Is it appropriate for this business type • Is the cost reasonable; are there soft costs • Is this a “vendor in due course” • Is vendor support necessary to function • Delivery and prefund issues • Should it be limited to a finance agreement Fraud invariably has lessee-vendor collusion

27. Final Credit Decision • Can they and will they pay for the term • Can you survive if they do not pay • Do you have, and will likely have, a buyer for the lease if you need to sell • Are the additional profits/benefits enough to outweigh the long term risk and effort “Enough is too much”Popeye, 1956 “Protect yourself at all times” Boxing referees

28. “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”Winston Churchill

29. Dwight Galloway RLC Funding Columbia, South Carolina 803-566-8245