Sources of my information

1. Broker, Discounter, or LessorWhat you must know to grow safely this time around(Learn from the mistakes of others)Dwight Galloway, CLPRLC Funding

2. Sources of my information • Started from zero as a lessor-idiot, made every mistake possible • Made all decisions, held all my deals, PG’d lines • 27 years as a lessor/funder holding every deal • +$5 Billion in applications; 200,000 decisions • +$2.6 Billion funded; 120,000 deals collected • Borrowed to build/hold $500 million portfolio • Survived through numerous changes/recessions Watched hundreds of broker/lessors confront the dilemma you now face: “Now what”?

3. Time to plan for growth • Economy beginning to slowly improve • Pent up demand for equipment • Careful buyers are shopping for best financing • Vendors and buyers need good relationships • You may have downsized to survive but will need to expand and/or change to prosper • Apply the recent lessons learned the hard way Plan for what you want to be in the coming years: Broker, Discounter or Lessor

4. What lessons have we learned • Concentrations, especially in cyclical industries, may not be the best foundation • Reps/warrants, recourse can be dangerous • Funders/lenders can change, leave, die • “Good” portfolios can go bad • You need all the tools/flexibility you can get to satisfy some of the better vendors • Fixed overhead is a terrible burden • Save your pennies for a rainy day--and there WILL BE a rainy day/month/year(s)

5. What you will hear today • Why be anything but a broker • Differences between broker/discounter/lessor • 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 • Understanding of credit risk and its impact • How to look DEEP into your credits

6. Why be anything but a broker • Seems more “professional” to some clients • Can take a deal off the street immediately • Name recognition for future repeat business • Ease of operating with standard docs • Allows faster cash flow on a deal (?) • Retain ownership of future residual (?) • Discounting allows you to make more money (?) • Portfolio provides cash flow in slow times (?) • Creates balance sheet for future sale of the business (?)

7. Differences in risk • Broker: has only reps/warrants with funder • Discounter: the originating lessor, even if for only one minute, has much greater/longer credit risk, more admin burden, more financial risk • Lessor: holding even a few deals has every risk • Credit-Credit-Credit • Licensing -Docs -Capital/Debt • Financial -UCCs -Limitations • Servicing -Taxation -Insurance • Collections -Audits -Reporting • Overhead -IT/software -Distractions

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

9. How to evaluate your capabilities • Are you comfortable as a long term risk taker • Credit, servicing, and collections will dominate YOUR time; can your business afford the distraction from originations • How much credit expertise do you really done • Will every employee be as careful as you • Can you do this and not let it impact your life Do you/they have the discipline/knowledge to follow your policies every minute of every day?

10. What resources/tools you’ll need • Policies and procedures: credit/funding/acctg documents/servicing/collections/regulatory • All bureaus, D&B, Paynet, accounting software, F/S underwriting tools, tax reporting, UCC’s • Qualified, reliable, personnel (especially you) • History (knowledge of credit performance) Money, money, money: no up-front net cash flow and you will need equity with your lenders as well as cash reserves

11. 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 Don’t go to just one person who held 10 deals!

12. What harsh facts will you learn(while making/holding your own credit decisions) • You will learn more about leasing and business 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

13. Other facts you will learn • No positive 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 at the rate you think reasonable, you probably shouldn’t hold 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…

14. Credit is #1 • Judging credit is the most important consideration in becoming a lessor • Rather than just finding an appropriate funder, you must make and live with the credit decision • You will be a start-up in a difficult business; thus are likely to fail! • Greatest challenge: knowing the financial impact of your credit profile It’s your money, your life, your bankruptcy

15. Understanding 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 • The full expense of losses • Accurate estimate of future net losses in order to set rates, satisfy your bankers, survive You must know your future performance NOW

16. Charge-offs: the 500lbs gorilla Applications 100 $2,500,000 Approvals 60 $1,550,000 Fundings 50 $1,250,000 Eventual charge-offs: 5% (2.5 of the 50) 1 more mistake out of 100 apps = Weak 2 more mistake out of 100 apps = Breakeven 3 more mistakes out of 100 apps = Bankruptcy

17. Static Pool Loss Curve

18. Timing of Losses *As % of static pool loss number • 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%

19. Static Pool to Annual Loss % Gross static pool chg-off 5.00% Plus: Expense to recover +.25% Less: Recovery -1.00% Net static pool loss 4.25% Weighted Avg Life (52 mos) 2.40 years Annualized loss as % of portfolio: 1.75% Impact on yield: 2.50%

20. 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

21. 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 the deal if/when you must • Vendor relationship and delivery/support issues Does it all make sense?

22. 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

23. Financials and tax returns • Get them when you can, verify sources • Learn the basics or employ a pro • 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 their reports are done is an indication of how the business is run

24. 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

25. 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 (X) • Delivery and prefund issues (!!) • Should it be limited to a finance agreement Fraud invariably has lessee-vendor collusion

26. Final Credit Decision • Can they and will they pay for the term • Can you survive if they do not pay • Will this violate your portfolio parameters • 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 “Protect yourself at all times”

27. To be or not to be…(a discounter or lessor) • Carefully evaluate your advantages and disadvantages • Honestly evaluate your ability under each • Ensure that you have ALL the assets/tools • Limit your exposure where possible • Get expert help/advice in specific areas Put your house and 401K in your spouse’s name

28. Dwight Galloway RLC Funding Columbia, South Carolina dgalloway@rlcfunding.com 803-566-8245