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Internet based cash flow financing-

Overview of how it works

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Presentation Flow

Overview of Cash Flow Financing

Effective New Business Origination

Credit Vetting Process

Customer Servicing Process

Risk Management Process

Loan Recovery Process

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Overview of Cash Flow Financing

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Cash Flow Financing Process

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How it works? - A Continuous Process

• Offline or Online origination

LoanOrigination

LoanUnderwriting

Loan RiskManagement

LoanServicing

• Powered by web-based scoring engine

• Initial approval result within 1 day

• Information is verified with supporting documentation and external credit checks are run. Complete document received, result within 1-5 days

• Data obtained integrated with risk monitoring platform

• Company’s sales, account receivables is submitted via Internet and collection is deposited into your designated bank account

• The exceptions based platform picks up any irregularities and credit risks

• Customer service personnel help SMEs on day to day operating issues

• Phone system for automating the funding process and information ready when answering customer phone call

• Platform monitors and increases loan limits based on credit quality and receivable levels

Customer LoanIncrease Request

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Features of Cash Flow Financing

It is a Revolving Credit FacilityLine size depends on the amount of eligible outstanding account receivablesLoan size range from US$25,000 to US$650,000Non-Notification basisSecured by a Charge over Receivables

All Invoices issued by the SMEs must be submittedInformation sent via Internet directlyno physical invoice needed

Borrow whenever SME borrowers need

All Payments from Debtors to be deposited into lending bank’s designated bank account or branch collection box

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Effective New Business Origination

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Target Market

Top 5% SME Market

Sought by all Banks, “Best” Clients

Bottom 10 % SME Market

Avoided by all Banks

Middle 85% SME Market

Primarily Collateral Lending or

Factoring, A/R Financing or not

Financed by Banks

SMEloan Focus

Sales turnover ranges: US$250,000 to US$7 million

Loan size ranges: US$25K to US$650K

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Buyers

Exporter

Manufacturer

Distributor

Wholesaler

Raw Material Suppliers

Importer

Cash FlowLending Market

Wholesale distribution

Plastic and Metal Manufacturing

Services (I.e. security guards)

Food distribution and trading

Watch components

Garment accessories

Textiles

Electronic Components

Paper trading

Printing

Potential Cash Flow Lending Market

High probability industry

Companies should be those that sell to local buyers on open account with working capital needs

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Differentiation Factors for Cash Flow Lending

- Convenience via internet

- Quick approval

- No security / collateral required

- Flexible in line increase

- Non-notification

- No fixed repayment term

- Reasonable pricing

- No selection of individual debtors

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BusinessDevelopment

Referral

Mass Media

Summary of SMEloan Asset Portfolio by Source

- Advertisement- Seminar & Exhibition

- CPA firms- Financial consultant- Relationship managers

- Debtor database - Direct mailing- Telemarketing - Commission sales 43.3%

19.6%

37.1%

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Comparison of Different Business Acquisition Options

1. Large number of rejections2. Expensive and unpredictable per deal acquisition costs3. Passive waiting for applicants

1. Reach large number of potential borrowersMass Media

1. Low chance of consistent deal close2. Extensive training of branch personnel to have effective results3. Competing with other “easy” to sell products4. Passive waiting for applicants5. Frequent challenges to pre-established credit box

1. Extensive reach to a large group of potential customersBranch Network

1. Not able to support the distribution of wide range of products available from the bank

1. Low fixed overhead2. Relatively quick start up3. Low per deal acquisition cost4. Consistent chance of deal close with good target data base5. Proactive to target high probability industries

Telemarketing Sales supported by field sales on closing

1. Low chance of consistent deal close 2. Frequent challenges to pre-established credit box

1. Low fixed overhead2. Relatively quick start up3. Low per deal acquisition cost4. Proactive to target high probability industries

Commission Sales

1. Not able to reach out to large number of small companies2. Low chance of consistent deal close3. Continued challenges to pre-established credit box4. High fixed overhead resulting in high per deal acquisition cost 5. Higher probability for price concession request

1. Leverage existing resources rapidly2. Size of transactions larger

Existing Relationship team and/or alliances

DisadvantagesAdvantages

Telemarketing together with field sales presents the most effective business origination solution. Our acquisition experience is for telemarketing supporting 2 field sales closing on average 3 deals per sales person per month at a per deal acquisition costs of US$1,250 per deal (credit limit of US$125,000).

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Analysis of resources requirement for telemarketing programs

% of approved applications acceptance 85% 20

% of companies applications approved 20% 24

% of companies submitting complete applications and documents 20% 118

% of companies showing interest 15% 588

Number of contacts needed 3,922

Days of working days a month (including Sat) 24

Analysis Conclusion

Average application success ratio 17%

Number of contacts per day 163

Number of calls per teleamarketer per day 35

Number of telemarkers needed 5

Initiate contacts

Functions of how many new deals you plan to close

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New Business Acquisition Flow

Initiate contacts

Pre-quality & ExplainOffering

Gather documents for applications (from 7-60 days) Credit approval(from 1-5 days)

Execute Documents

Typical new business acquisition flow

Key to success of new business acquisition flows

1. Enlarge the number of contacts initiation2. Improve pre-qualification effectiveness3. Reduce costs of gathering documents (the longest and most time consuming process)

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Distribution Effectiveness Matrix

XMass Media

XBranch Network

XXXTelemarketing Sales supported by field sales on closing

XXCommission Sales

XExisting Relationship team and/or alliances

Reduce costs of gathering documents

Improve Pre-qualify effectiveness

Enlarge contact initiations

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Successful Telemarketing Strategies

• Availability of targeted data base

• Appropriate incentive structure of telemarketers

• Appropriate scripts and trainings for telemarketers

• Appropriate follow up process from “warm leads”

• Availability of continued “MASS CONTACT” materials

• Industries include printing paper, food, services, metal, wholesalers and importers and distributors selling on open account, e.g. data sources from HKTDC and D&B.

• Base salary +commission for pre-qualifying leads and arranging appointments for Sales to close/commission for gathering documents for IA/ commission for closing deals. Distribution of salary and commission should be 70%/30%

• SMEloan possesses standard scripts and FAQs

• Establish Sales follows up process within 24 hours of passing of warm leads

• Materials to remind prospects of your existence and they will call when needs arise

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What are the customer’s Concerns?

Pricing too high?

ProceduresComplicated?

Impact on existingBank

Relationship?

BusinessNeeds?

Control ofcash flow for non-financed debtors

Over-dependenceon one bank?

Effective selling will depend on knowing how SMEs buy. Knowing their concerns and howto address their concerns is crucial. They have to like you too.

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Addressing Concerns

•Cash flow financing ensure flexibility to capture opportunities (opportunities are not known when they will occur•You emphasize desire to be their main banker

Impact on my existing relationship with a A/R debenture granted to one bank

•Just report information that they know best, I.e. debtors, sales and cash•No need to submit physical documents that are more cumbersome•Same way of borrowers extending open account credit to their buyers

Procedures complicated and ask a lot of documents

•Knowing one bank well and doing most business with one bank will ensure continued support•Given them confidence you will continue to support them when their needs change and grow

Over-dependent on one bank

•High transparency ensures on-going support and line increases•Need to make them understand it is cash flow financing (not A/R factoring) and you want to be their main bank

Control of cash flow for non-financed debtors

•Cash financing makes money. •Committed line flexible to support sales increase•Additional interest a small fraction of gross margin•Cheaper than factoring which is based on sales invoices in most cases

Pricing too high

How to addressConcerns

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Credit Vetting Process

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Approval Process Overview

Application Initial Approval -Scoring Engine

Loan size and advance ratio

Credit Vetting Verify the accuracy of information

Final Approval -Scoring Engine

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Credit Vetting - Documents Required

a. Identity of applicant- Business Registration- Certificate of Incorporation- Memorandum & Articles

e. Last 6 months’ sales figures

f. Accounts Receivable- Debtor listing- Major debtor’s invoices and last

payment information

b. Identity of owners- Identity card copy- Address- Contact number

c. Cash and Bank- Bank facility letter- Bank statements- Bills statements

d. External Obligation- Leasing- Hire & Purchase- Installment Loan- Agreement and settlement proof

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In Principal Approval• The principal is to have a “snap shot” view of the financial position of

the borrower for the last six months to ensure borrowers are able to meet their obligations and business and cash flow are consistent and steady and their customers are paying them.

• Performance of business and cash flow more important than the capability of management

• Some of the key data includes:• Industry• Length of existence• Bank financing and obligations• Customer mix• Litigation history• the conduct of the bank account

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Credit Vetting Process

a. Identity of applicant- Company search /

Business Registration search- Negative file check

b. Identity of owners- Negative file check on all

shareholders & directors

d. Accounts Receivable- Ascertain adequacy of collateral- Company search & negative file check- Identify ineligible debtors- Review sample invoices and

last payment details

c. Cash and Bank- Review bank facility for nature & utilization of bank line- Review bank movement for business pattern- Review bills statements for delinquency- Review collection and sales variance

e. External Obligation- Check for delinquency

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Loan Approval - Snapshot of Cash Flow/Business for Past Six Months

Lease obligations

Suppliers

Bank loans

Installment loans

Employee wages

MortgagesSales Cash

Account Receivable

The key in loan approval is to make sure companies are doing enough business and collectingenough cash from their customers to pay their bills on an ongoing basis.

Source of infocomes from bankstatements

Source of info comes from SME borrowers

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Highlights on Credit Vetting Process

• Recent performance and cash flow, not historical performance

• Standard procedures / process to enable fast turn around time

• Quantitative and objective assessment

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Customer Servicing Process

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• Customer Services

• Web Training

• Cash Management

Post-Approval Process Overview

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Customer Services

• Bilingual Help Desk and Customer Services– Account Inquiry– Advance requests and daily funding issues– Debtor payment status and collection records– Technical support– Portfolio utilization program– Customer referral program– Facility line increase to reward positive performers

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Sample of Monthly Call Tracking Reports

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Sample of Monthly Call Tracking Reports

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Web Training• Setup and Operation

– 2 hours per training at customer’s site, able to handle 20-30 customers per month

– Activate the Login Name & Generate Password from system– Assist customer to extract data from account system into upload format

• Functions and features– Home Page Account Information– Account History Enquiry– Advance Request– Post Invoices– Apply Payments– Upload Files– Outstanding Account Receivables Report– Add/Edit Debtors– Add/ Edit Users

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$

$

Cheque Drop into Cheque Deposit Box

at branches

You manage any info discrepancy

Cash Management Process

Scan check and input info into SMEloan

systemYour bank

Your bank

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• Scalable operation• Multi-channel support – centralize customer’s inquiry• Effective retention programs

– Line increases– Promotions– Referral

• Cash management – key to success of account monitoring

Post-Approval Process Highlights

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Risk Management Process

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Risk Management Methodology

• Proactive account monitoring based on current data instead of outdated financial statements

• Focus on cash flow, not just collateral

• Focus on exceptions on risk management rather than judgmental relationships

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Risk Management Process

Identification Analysis Action Strategy

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Identification

• Exception System to evaluate sales and cash flow trend and identify SME borrowers with operating issues

Identification EngageCustomers Action Determine

Viability

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Composition of Cash Flow

SME Customers

Amount ofSales

Cashflow

Collectionfrom SME Customers

These are three pieces of information SME borrowers will always know.

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Credit Monitoring

BeginningPoint

Desirable clients

Desirable clients

Problematic clients

Any Deterioration will accelerate theproblems

Cash flow/Sales

Time

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Operating Problems

1) No Cash – The borrower has not deposited cash collections for 14 days.

2) No Sales – The borrower has not posted invoices for 21 days.

3) Debtor Payment Problem – The borrower’s general debtors collection are not paying promptly

4) Material Debtor Payment – The borrower’s material debtors are not paying promptly.

5) Declining Sales – The borrower’s sales are decreasing for a period of time.

6) Excessive Aging AR – A large portion of a borrower’s accounts receivable are not being collected on time.

7) Aging AR Upward Trend – A borrower’s accounts receivable show an upward trend of receivables aged.

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Unusual Reporting Activities

1) Unusual activities: Material Dilution – A borrower’s accounts receivable have a large amount of credit adjustments.

2) Invoice Submission During Non-business Hours – A borrower has significant submission of invoices during odd non-business hours.

3) Unusually Large Invoice – A borrower has submitted an invoice value much larger than normal.

4) Large New Debtor Balance – A borrower has added a new debtor whose receivables comprise a large portion of total receivable.

5) Unusual activities: Invoice Cancellation – A borrower has significant invoice cancellation after submission.

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Engage Customers

• Engage customers to find out specific payment details that causes problems

• Determine their expected time frame for the improvement of sales and cash flow

• Transparent to customer and share our views on their cash flow problem

Identification Engage Customers Action Determine

Viability

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Determine Viability

• Monitor the performance of SME borrowers. Any continuous decline or inability to correct the operating exceptions could result in the conclusion of viability of customers

Identification Engage Customer Action Determine

Viability

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Action

• Negotiate with SME borrowers for loan repayment. Add additional guarantors and collateral if needed

• Obtain invoice copies and perform receivable confirmation• Convert cash flow loan to notification basis• If necessary, enforce security interest on account receivable collateral

by notifying SME borrowers’ debtors of the assignment of account receivable, effectively becoming owner of account receivable

Identification Analysis Action Strategy

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Results

• Early warning capability

• Improved asset quality

• Reduced loan servicing cost

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Summary

• Preferred analytical alternative to traditional risk methodology

• Standard criteria ensures institutional consistency

• System and defined process enable scalability

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Loan Recovery Process

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Crystallization

We crystallize means we now convert a floating charge on accounts receivable into fixed charge and amount of account receivable that is going to be collected to repay debts owed to us become crystal clear.

Accomplish by simply notifying SME borrowers’ debtors in writing, either in fax, in letter

DetermineCrystallization

FaxAssignment

Letter

SendAssignment

Letters

Follow upPhone calls to

Debtors

CollectPayments

From Debtors

Account Manager Document Control Document Control Collateral Control Collateral Control

Crystallization Process

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Why would You Crystallize

Essentially the last resort as it could have negative impact on SME borrowers’ on-going businessWe crystallize because:

• SME borrowers not cooperative and not willing to negotiate or repay debts after we demand

• SME borrowers business deteriorating significantly and is no longer viable• We determine our A/R collateral is rapidly depleting, ie.SME borrowers collecting

directly from debtors with an intention of keeping the proceeds

Once you decide, must act QUICKLY. Timing is everything.

Why timing is important?

Debtors who have been notified by the bank, are required legally to pay the bank and cannot pay SME borrowers or risk paying the same amount due twice.

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Common Mistakes

We move too slowly and guarantors skip town or companies are closed down overnight.

Must always focus on one key question.

Is it a viable business financially and on a cash flow basis?

No business can survive with no/little cash flow and no/little sales. There is always a pattern of business and cash flow.

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Things to Remember in Crystallization

Always be courteous as debtors do not have contractual relationship with the bank

The objective is to minimize our costs and time of getting paidby

winning them over to “pay” us as they are our sources of payments andby

being cleared of explaining our position and our rights, sometimes with

the help of providing assignment letter documentation or a letter from our solicitor

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Common Responses of Debtors in Crystallization

“There is no balance outstanding”• It is positive as the debtor acknowledges there is such supplier

– Make sure we confirm the debtor receives our letter without problems– Seek to inquire when was the last time payment made to supplier– If recent payment within the last 1 month, seek to ask for receipt an payment

evidence, ie.receipts issued by SME customers, cancelled check copies, bank statement showing the settlement

“I have never heard of this supplier”• Not entirely surprising as debtors do not know who the bank is

– We will follow up again for one/two more times– Make sure confirm they receive our letter without any problem– If debtors continue to be reluctant to listen, will have to send legal demand letter to

debtors. Typically sufficient to bring debtors into dialogue

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Common Responses of Debtors in Crystallization

“I have paid them recently”• Not entirely surprising as SME borrowers could have tried to collect as much

as possible due to their financial problems– Make sure we confirm the debtor receives our letter without problems– Seek to inquire when was the last time payment made to supplier– If recent payment within the last 1 month, seek to ask for receipt an payment

evidence, ie.receipts issued by SME customers, cancelled check copies, bank statement showing the settlement

“They owe me money too”• It is possible that SME borrowers might have borrowed money from debtors

or SME borrowers are in the industry when they collect deposits– Make sure we confirm the debtor receives our letter without problems– Seek to inquire how much was owed and provide proof of claims– Possible to dispute if debtors are owed by SME individually as opposed to the

company

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Common Responses of Debtors in Crystallization“I have given him deposits”• It is likely for some industries to have deposits, especially in professional

services and contract related business• Should seek to obtain evidence of deposits

“I have moulds and tooling in his factory”• Not entirely surprising as SME borrowers could have tried to avoid having to

pay bills owed. Some might even claim for damages because moulds and tooling are with SME borrowers

– Make sure we confirm the debtor receives our letter without problems– We will never allow them to claim more than the tools and moulds for producing

goods for the invoices outstanding. Debtors cannot claim cost of moulds ten years ago.

“Let me check and get back to you”• Positive feedback as the debtors appear cooperative• Always keep a timetable of when to follow up. Be sure to be diligent to follow

up and be courteous.

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Using cash flow lending to enhance competitive edge

GOAL: Become MAIN OPERATING bank of SMEs

Sell cash flow loans to existing

clients ensuring higher client retention

Strengthening overall competitive edge

against competitors for certain group of new customers

Acquiring completelynew segment of

smaller SME clients

Relationship Manager to increase utilizationof existing borrowers

Telemarketing/SalesCommission sales

Advertising

Telemarketing/SalesAdvertising

Accountant referrals

> US$1.25 million < US$625KUS$250K to $2.5 milloinLoan Size

Import/Export LC TROD

Export factoringSMEloan

Import/Export LC TROD

SMEloanSMEloan

Exception system capturing total sales:

Domestic Sales + Export LC Sales + Export Open Account Sales + Export DA DP Sales

DistributionChannels

Loan Type

CompleteCash flowinformation

AdditionalDataPoint

Strategies

Exhaust all balance sheet assets before you should offer clean facilities to SMEs.

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How to win business by offering SMEloan?

By offering SMEloan to this company, you would be able to get an additional $2.6 million trade and mortgage facility.The key is how much weights and relevance would you place on receivable collateral.

Industry PrintingAnnual turnover 40,000,000$

Without SMEloan With SMEloanBank XYZ Bank ABC Total Total

Loan TypesOverdraft 340,000$ 300,000$ 640,000$ L/C, T/R 1,000,000$ 1,200,000$ 2,200,000$ 2,200,000$ Instalment Loans 400,000$ 400,000$ 400,000$ SMEloan -$ -$ -$ 2,000,000$ Total loans 1,740,000$ 1,500,000$ 3,240,000$ 4,600,000$

Collateral valuesReal estate 980,000$ 980,000$ 1,960,000$ 1,960,000$ Deposits 300,000$ 300,000$ 300,000$ Account receivable 7,000,000$ Total collateral 1,280,000$ 980,000$ 2,260,000$ 9,260,000$

Unsecured portion 460,000$ 520,000$ 980,000$ -$

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How to win business by offering SMEloan?

By offering SMEloan to this company, you would be able to reduce its clean exposure and control cash flow of the company..The key is how much weights and relevance would you place on receivable collateral.

Industry Business form and paper tradiingAnnual turnover 25,000,000$

Without SMEloan With SMEloanBank XYZ Bank ABC Total Total

Loan TypesOverdraft 500,000$ 500,000$ 1,000,000$ 1,000,000$ L/C, T/R 4,500,000$ 1,000,000$ 5,500,000$ 5,500,000$ Instalment Loans 1,380,000$ 743,000$ 2,123,000$ 2,123,000$ SMEloan -$ -$ -$ 1,600,000$ Total loans 6,380,000$ 2,243,000$ 8,623,000$ 10,223,000$

Collateral valuesReal estate 3,940,000$ 1,750,000$ 5,690,000$ 5,690,000$ Deposits -$ -$ Account receivable 3,500,000$ Total collateral 3,940,000$ 1,750,000$ 5,690,000$ 9,190,000$

Unsecured portion 2,440,000$ 493,000$ 2,933,000$ 1,033,000$

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Thank You