1. SBA 101 - Introduction to SBA Lending
WPASGL 2014 Quality Circle
March 13, 2014

2. PURPOSE OF SBA FINANCIAL ASSISTANCE
The purpose of SBA financial assistance is not to encourage banks to make bad loans.
SBA’s purpose is to help businesses with a reasonable chance of succeeding obtain financing needed on reasonable terms.
“SBA will not make a bad loan good, but will make a good loan possible”
Most loans have some degree of risk. Each bank must decide how much risk the bank is willing to take. The SBA guaranty loan program is intended to assist in making loans that the bank believes will be good loans, and to a small businesses in which the bank has confidence, but for some reason does not quite meet the bank’s normal credit standards. Usually this is due to a lack of adequate collateral or capital, or because the business is a start-up.

3. Who is SBA? SBA is a Federal Government Agency
Uses Taxpayer Dollars to Expand the Breadth of Small Business Lending by the Private Sector
SBA Headquarters – Washington D.C.
Makes and Implements Policy
Centers Delivery Programs
SBA Regular Guaranty Processing Center – Citrus Heights, CA
PLP & SBA Express Processing Center – Sacramento, CA
Loan Servicing Center – Little Rock, AR
National Guaranty Purchase Center – Herndon, VA
SBA Pittsburgh District Office
Serves as liaison between Centers and Lenders
Marketing & Outreach of SBA Programs

4. THREE PRINCIPALS IN AN SBA GUARANTEED LOAN
Small Business
Bank
SBA
The bank is the central figure . In most cases, the small business has no contact with SBA. Usually, the small business applies for a loan to a local bank. If the loan is approved, subject to an SBA guaranty, the bank will provide SBA application forms to the small business. The application is returned to the bank when completed, and the bank submits the application to SBA along with a request for guaranty. Once approved, the bank will close and service the loan in the same manner as other bank loans that do not have an SBA guaranty.

5. BENEFITS TO SMALL BUSINESS
Gives small businesses a flexible financing alternative when funding is not otherwise available on reasonable terms.
Allows for longer terms and lower payments than traditional loans
Equity/Downpayment requirements may be more flexible than traditional financing
The primary benefit to small business is the ability
to get financing in the amount needed, and for the
term needed, when it might not otherwise be
available. Most of our loans are long-term loans.

6. Situations Where an SBA Guaranty May Be Necessary
Startup Businesses
Lack of Collateral
Lower Than Normal Downpayment/Equity
Longer Term/Lower Payments Required to Meet Debt Coverage Requirements
Riskier Industries (Entertainment, High-Tech, Service, Retail)
Uneven Historical Revenues or Profits
Tighter Than Normal Debt Coverage
Change of Ownership/Management
Lending Limits
Reliance on Projections

7. Benefits of SBA Lending
Increase Your Loan Portfolio
Eliminate missed opportunities
Small Business has highest growth potential
Improve Risk Management
SBA Lending Has an Inverse Relationship to Economy
Broaden Your Customer Base
Provide Better Service
Longer terms, lower monthly payments
Lower Downpayments
SBA Loans Meet CRA Requirements
Allows your bank to be more competitive

8. Benefits of SBA Lending (cont.)
Increase Profitability - SBA Loans can provide good return on pricing
Relationship Building and Cross Sale Opportunities
Opens a source of cash to your bank
Secondary Market (Premium & Servicing Income)
Career Building Opportunities
Niche Lending
Experienced SBA Lenders are in Demand
Offer Specialty Loan Programs

9. How Does SBA Work with Lenders?
Loan Guaranties – SBA 7(a) Loan Program Umbrella
SBA Guarantees or Insures a percentage of the risk to the Bank
Pursuant to Eligibility, Underwriting, Closing and Servicing Requirements
In accordance with the SBA Loan Authorization
Assumes a Prudent Lending Standard
In the event of a default, once primary assets are liquidated, Lender can request that SBA honor or “purchase” its guaranty
SBA reimburses the approved percentage of loss to the Bank
50% to 90% Guaranty Depending on Program
Gap Financing – SBA 504 Program
SBA guaranties subordinate lien financing to a Bank Loan
Certified Development Companies act as SBA’s Agent
Only Available for Fixed Asset Financing
Provide 30% to 40% of Project Financing in subordinate lien position to primary lender
Bank provides a conventional first mortgage/first lien loan at 50% of cost/value of fixed asset financed

10. SBA Lending Authority
750 Agreement Provides the Basis for SBA Guarantee
Regular 7(a) Lender
SBA Performs Complete and Independent Eligibility Review & Credit Analysis
CLP Lender
SBA Performs a Credit Review of Lender’s credit analysis
Lender Prepares Draft of SBA Loan Authorization
SBA Relies Heavily on Lender’s Analysis and Recommendation
PLP Lender
SBA Performs only a brief eligibility review
Credit Decision is delegated to the lender
Lender executes SBA Loan Authorization on behalf of SBA
Immediate approval thru SBA E-Tran system
Contract & Working Capital Caplines now available thru PLP

11. ELIGIBILITY When Should Eligibility Be Determined? AS SOON AS POSSIBLE
Determination of Eligibility of the Business Size, Type, and Use of Proceeds Should Be the First Consideration in the SBA Loan Making Process.
May Eligibility Be Considered Prior to Formal Application? YES!
You Are Encouraged to Contact the District Office When Unclear About the Eligibility of a Particular Business or Transaction
Saves Time and Effort

12. Eligibility Credit Elsewhere Criteria
SBA provides business loan assistance only to applicants for whom the desired credit is not otherwise available on reasonable terms from non-Federal sources.
Lender’s signature on the SBA loan application constitutes certification that credit is not available elsewhere (conventionally).
Lender’s file must be documented to explain the factors that prevent the financing from being accomplished without SBA support.

13. Size Standards How Small is a Small Business?
Size Standards are Based on NAICS Codes
Typically Based on Number of Employees or Annual Receipts
Retail - $7 Million (3 year average)
Manufacturing Employees
Wholesale Employees
Service - $7 Million (3 year average)
Alternate Size Standard
Tangible Net Worth <$15MM
Average 2 Year Net Income < $5MM
Size Is Based on the Combined Operations of an Applicant and All Its Affiliates
Affiliates are businesses that have common ownership, common management or contractual relationships

14. Ineligible Businesses
Non-Profits
Passive Holder of Real Estate (Landlords)
Businesses Located in a Foreign Country
Businesses Engaged in Gambling
< 1/3 of annual gross sales from legal gambling eligible
Criteria for lottery income is based on commission
Businesses Which Restrict Patronage for other than capacity
Businesses with an Associate on parole, probation or incarcerated
Businesses Engaged in Promoting Religion
Cooperatives
Equity Interest by Lender
Businesses Providing Prurient Sexual Material
Business or Associate which defaulted on a Federal loan resulting in a loss to the government
Includes Government Guaranteed Student Loans
Does not include tax obligations
Speculative businesses

15. Eligibility (Cont.) Utilization of Personal Resources
Applies to all 20% or more owners
Limitations on liquid assets
< or = $250,000: 2XFinancing Package or $100,000, whichever is greater
$250,001 to $500,000: 1.5XFP or $500,000, whichever is greater
> $500,000: 1XFP or $750,000, whichever is greater
Liquid assets in excess of these limits must be injected and reduce the requested SBA financing accordingly
Liquid Assets include: cash, CD’s, marketable securities, unassigned CVLI
Does not include: closely held stock, retirement accounts, real estate, pledged as collateral >6 months.
Liquid Assets cannot be pledged as collateral in lieu of injection
STAY TUNED – THIS RULE MAY BE ELIMINATED SHORTLY!

16. Eligible Passive Company
Formerly “Alter Ego” Rule
Exception to Restriction on Passive Concerns
Operating Company Must be Ultimate Beneficiary of the Financial Assistance
EPC Rule No Longer Requires Commonality of Ownership Between the Passive and Operating Companies
EPC Must Use Loan Proceeds to Acquire or Lease, and/or Improve or Renovate Real or Personal Property that It Leases to the Operating Company
EPC and OC Must Meet Size Standards
Lease Must Be In Writing
Term of lease must at least equal term of loan
Assignment of rents required

17. Franchises Franchisee must have the right to profit from their efforts
Franchisor must not have undue control over the operation of the business
Franchise Agreements and FTC disclosures must be reviewed by SBA or Bank depending on program used
Consult SBA Franchise Findings List
All franchises are listed on
Must first determine SBA eligibility – either internally as a PLP or with SBA Review
If eligible, must have appropriate certifications from franchisor

18. Franchise Registry

19. Other Eligibility Issues
Prior Criminal Convictions
Must be disclosed on SBA Form 1919 Borrower Information Form and SBA Form 912 Personal History Statement
Single or remote in time minor offenses can be cleared by SBA District Office
Felonies will require fingerprint check and clearance only by SBA Headquarters
Non-US Citizens
Must be permanent resident aliens OR
Management must have citizenship or permanent resident status and operated business for at least 1 year AND
Loan must be 100% collateralized by assets in the U.S.
CAIVRS – Credit Alert Verification Reporting System
Now REQUIRED to be used for loans processed under delegated authority to identify delinquent federal debt
or prior loss to government
SAM/Excluded Parties List – Now REQUIRED to be consulted by ALL LENDERS to determine if employees or agents are permitted to conduct business with federal government . Lenders must also consult SBA’s own list of excluded parties at - Agents include attorney, accountant, consultant, broker, or packager

20. Loan Proceeds Eligibility
Eligible Uses of Proceeds
Real Estate
Acquire land and/or buildings
Construction, Renovation or Improvements
Purchase of Fixed Assets (M&E,F/F)
Inventory
Working Capital
Ineligible Proceeds Use
Payment to an Associate
Officer, director or owner of more than 20%
Floor Plan Financing
Payment of Delinquent Taxes

21. Debt Refinancing
SBA does not refinance debt that is on reasonable terms.
Must justify unreasonable terms to refinance existing debt with SBA
Balloon notes, demand notes, and business credit card debt are all considered by SBA to be on unreasonable terms
Lender must evidence at least a 10% improvement in cash flow (i.e. reduction in debt service) thru the proposed refinance
You can refinance your own institution’s debt if on unreasonable terms and has been current for last 36 months.
All debt to be refinanced must be documented and verified as business related
Home Equity Loans used for business purposes are again eligible for SBA refinancing

22. Real Estate Financing with SBA
SBA Financing is only for “Owner Occupied” Real Estate
For acquisitions and refinances, 51% of total square footage must be owner occupied
SBA now allows exterior space actively used in business to be included in the calculation
For construction, must be at least 60% immediate owner occupancy, and 80% long term owner occupancy
No SBA Loan Proceeds can improve leased space
Common improvements are allowed

23. Financing Changes of Ownership
Asset Purchases or Stock Purchases Allowed
In case of stock purchase, business must be co-borrower with stock purchaser
Must be a complete buyout of the departing or selling owner
Must provide a benefit to the business
Business Valuation must be completed by Lender or Third Party depending on size of transaction and level of goodwill
If amount financed less appraised value of fixed assets < $250k, then Lender may perform its own valuation
If amount financed less appraised value of fixed assets > $250k or if close relationship between buyer and seller, third party valuation by qualified professional will be required
If goodwill/intangible assets > $500k, then Borrower must have a 25% equity injection for PLP submission

24. SBA’s Lending Criteria
Character, Reputation and Credit History of Applicant
Experience and Depth of Management
Strength of the Business
Proforma Balance Sheet
Working Capital Adequacy
Past Earnings, Projected Cash Flow and Future Prospects
Note trends in revenue and cash flow
Ability to Repay Loan with Earnings from the Business Operations

25. Credit Underwriting Standards Loan Amounts up to $350,000
All Loans Pre-Screened Using SBA Credit Scoring Model
Pre-Screened thru SBA E-Tran
Helps to Have Business DUNS Number
Current Minimum Score is 140
If Application passes pre-screen, can submit application thru E-Tran for expedited approval
If application does not score adequately, must submit thru regular processing or under SBA Express with reduced 50% SBA guaranty.
Lenders Credit Memo in file must:
Demonstrate ability to repay loan from business cash flow
Evidence historical or projected debt service coverage ratio of greater than 1:1 on both business and global basis

26. Credit Underwriting Standards Loan Amounts up to $350,000
Lender’s Credit Memo Requirements (Cont)
Brief Description of Business and its History
Lenders must verify financials vs. income taxes thru IRS Form 4506 process
Owner/Guarantor Analysis – Based on lender’s policy for similar sized non SBA loans
Determine if Equity and Proforma debt to worth are acceptable
Require and verify equity injections if part of policy for similar conventional loans

27. Credit Underwriting Standards Loan Amounts Over $350,000
Must evidence a debt service coverage ratio on a historical and/or projected basis of not less than 1.15:1 based on operating cash flow
OCF defined as EBITDA with appropriate additions and/or subtractions including unfunded capital expenditures, non-recurring income, distributions, rent payments, owners draws, etc.
Brief Description of Business & History
Management Capabilities and Experience
Spread of Proforma Balance Sheet
Most recent balance sheet + changes due to loan, use of proceeds, equity, etc.
Use Page 2 of prior SBA Form 4-I as best practice

28. Credit Underwriting Standards Loan Amounts Over $350,000
Lenders Credit Memo Requirements (Cont)
Ratio Calculations including
Current Ratio
Debt/Net Worth
Other ratios significant to industry (turnover ratios, etc.)
Collateral Adequacy Assessment
Discussion/Analysis of Competition, Seller Financing, Standby Agreements, Delinquencies, Trade Disputes, Liens, Judgments, Franchise Agreement

29. Lending Criteria (Cont.)
Sufficient Invested Equity to Operate on a Sound Financial Basis
Generally will not provide 100% financing for a new business or business purchase
Debt/Worth is primarily tool for determining adequacy of equity
Adverse Equity Ratio Can Be Offset By:
Pledge of outside collateral
Experienced Management
Standby Debt
Personal Debt May Be Considered Equity:
On Full Standby
Outside Income/Repayment Source Outside of the Business Present and Sufficient to Service the Debt

30. Collateral for Loans up to $350,000
For loans of $25,000 or less, lenders are NOT required to take collateral.
For loans over $25,000 and up to $350,000:
Lenders follow collateral policies for conventional loans of same size and type
Lenders must minimally take a lien on the applicant’s fixed assets and any assets financed with loan proceeds or that are collateral for existing loans being refinanced
Lenders may also secure trading assets if it does so for conventional loans
Life insurance – Lenders use policy for conventional loans of same size and type

31. Collateral for Loans over $350,000
Lenders should collateralize loans to the maximum extent possible up to the loan amount
Determination of fully secured includes:
Real Estate – 85% of net book or appraised value minus prior liens
New Equipment – 75% of net book or 80% of orderly liquidation appraisal minus prior liens
Used equipment – 50% of net book or 80% of orderly liquidation appraisal minus prior liens
Trading assets 10% of current book value
If Borrower/Business assets do not fully secure the loan, lender must take available equity in the personal real estate of the principals as additional collateral until loan is fully secured or all available collateral has been pledged
SBA does not require lender to take a lien on personal residence when less than 25% equity
Life Insurance – Required when loan not fully secured and single owner or business dependent on one owner’s participation

32. Maximum % of SBA Guaranty
7(a) Term Loans & Caplines
85% on loans up to $150,000.
75% on loans over $150,000.
SBA Express
50% Guaranty
International Trade & EWCP
90% Guaranty
SBA can guaranty 75% to 80% of a small business loan, depending on the size of the loan. This provides the bank with additional coverage and reduces the bank’s loss in the event something goes wrong and the borrower is unable to repay the entire loan balance.

33. Maximum Loan Amount 7(a) Term Loans & Caplines SBA Express 504
SBA combined exposure is limited to maximum of $3,750,000.
Can be one loan or numerous loans up to $3,750,000 limit.
Gross Loan Limit is $5,000,000
SBA Express
$350,000 except
Export Express $500,000
504
$5,000,000 Debenture Limit
There is no maximum on the amount of a guaranteed loan, but the guaranty percentage reduces if the loan amount exceeds $1 million because the SBA guaranteed portion cannot exceed $750,000. Also, there is no limit on the number of SBA loans a small business can have, but the total guaranteed portion of all loans combined cannot exceed $750,000.

34. Maturity of Loans 7 to 10 years for working capital.
Up to 10 years for equipment.
Up to 25 years for real estate.
SBA will blend maturity for multiple uses of proceeds OR
Use maximum maturity for asset comprising the largest percentage of the loan
Many times the main benefit of an SBA loan is the extended repayment terms. We attempt to match repayment terms with the cash flow a business has available for repayment. Most banks will approve a longer maturity with an SBA guaranty than bank policy will allow on regular commercial loans.

35. Maximum Interest Rates
Must use SBA approved Index
Wall Street Journal Prime Rate
LIBOR Base Rate
SBA Optional Peg Rate
Prime plus 2-1/4% for maturities under 7 years.
Prime plus 2-3/4% for maturities of 7 years or longer.
Exceptions for smaller loans: (Up to $50,000)
May charge 1% more on loans between $25,000 and $50,000; and,
2% more on loans under $25,000.
Express Loans & Small Loan Advantage can be priced up to 6.5% over WSJ Prime
Lenders should compensate for 52 basis point servicing fee in pricing for loans in excess of $150,000.
Interest rates on SBA guaranteed loans are negotiated between the borrower and banker. SBA has a maximum interest rate allowable on loans, based on maturity of the loan, with a higher interest rate on the smaller loans under $50,000. However, this is normally not a problem because most SBA guaranteed loans in Alabama do not carry the maximum allowable rate.

36. Guaranty Fee Changes
Simplified structure, previous tiered structure has been eliminated.
During FY 2014 only (10/1/13 thru 9/30/14), if total loan is $150,000 or less there are NO SBA guaranty fees or servicing fees
If total loan is between $150m and $700m: Fee is 3% of SBA guaranteed portion.
If total loan is more than $700m: Fee is 3.5% of SBA guaranteed portion.
Guaranteed portions of loan in excess of $1MM are charged at 3.75%
If Loan is 12 months or less in term and greater than $150,000, fee is only ¼ of 1% of SBA Guaranteed Portion
Guaranty Fee Due to SBA within 90 days of approval if longer term loan > 12 months
Guaranty Fee Due to SBA within 10 days of approval of short term loans of 12 months or less
SBA Veterans Advantage – No upfront SBA guaranty fee for SBA Express loans up to $350,000 for businesses owned 51% or more by a Veteran

37. Guaranty Fee Examples $150,000 Loan $500,000 Loan $800,000 Loan
NO SBA Guaranty Fees during FY 2014
$500,000 Loan
75% guaranty ($375,000)
3% fee ($11,250)
$800,000 Loan
75% guaranty ($600,000)
3.5% fee ($21,000)
$3,000,000 Loan
75% guaranty ($2,250,000 guaranty)
3.5% fee on 75% guaranty of 1st $1MM ($26,250)
PLUS 3.75% of 75% of remaining $2MM ($56,250)
Equals $82,500 total SBA guaranty fee

38. Packaging & Broker Fees
SBA now permits brokerage and packaging fees to be based on a percentage of the loan amount
Fees must be reasonable and customary
Cap of 3% on loans of $50,000 and less
Cap of 2% on first $1MM and ¼% thereafter
Maximum fee of $30,000
Must still be disclosed on SBA Form 159

39. The SBA 7(a) & Caplines Application
SBA Form 1919 – Borrower Information Form
SBA Form 1920 – Lender’s Application for Guaranty
SBA Form 4a – Collateral Schedule – No longer required form but best practice for collateral listing
SBA Form 159 – Compensation Agreement (if agent involved)
SBA Form 912 – Personal History Statement (if criminal conviction)
IRS Form 4506 – Request for Tax Transcript
SBA Form 1846 – Statement Regarding Lobbying

40. SBA Express Reduced SBA Guaranty of 50%
Bank uses own documentation and underwriting process
Can charge fees reasonable and customary for conventional loans of same size and type
Can use for revolving lines of credit

41. Caplines Contract Caplines
Funds all contract costs as contract is completed
No longer requires assignment of contract in all cases
Seasonal Caplines
Finance seasonal increases in accounts receivable and inventory
Builder’s Capline
Funds construction or substantial renovation of residential or commercial buildings for resale
Working Capital Caplines
Fund short term working capital needs
Up to 10 year maturity
Governed by a borrowing base certificate or must be fully collateralized on a 1:1 collateral ratio
Advances allowed up to 80% of A/R and 50% of Inventory

42. TYPICAL 504 PROJECT
Private-sector lender % of project cost - first mortgage on assets being acquired.
CDC - maximum of 40% of project cost - from sale of SBA guaranteed Debentures - second mortgage on assets being acquired.
Borrower - at least 10% of project cost - up to 20% injection may be required.
Financing for a 504 project may appear complex at first glance, but it is really rather simple. For example, if a small business wishes to purchase a building that costs $1 million:
The bank finances $500,000 and gets first mortgage on the property - SBA finances $300,000 to $400,000 and gets second mortgage on the property.
Borrower puts in $100,000 to $200,000. Usually, borrower puts 10% into project, but must put in an additional 5% if in business less than two years, or if building is a limited purpose structure. (Explain)

43. 504 Loan Program
Purpose: Fixed Assets Only - No working capital or debt refinancing.
Maximum SBA participation is $5,000,000
$5.5MM for Manufacturers & Energy Efficient Projects.
Minimum SBA participation is $50,000.
Maturity for Debenture is 10 or 20 years.
Must create or retain one job for every $65,000 guaranteed ($100,000 for manufacturers) or meet SBA public policy goals.
You are very limited in what you can do with loan proceeds in this program. It is strictly for the purchase of long-life fixed assets. This program can be used for projects up to $4 or $5 million dollars in size, and for projects as small as approximately $125,000. Smaller projects, and situations not eligible under this program, should be handled using the guaranty loan program. One of the main purposes of this loan program is to create jobs. It is a very popular program in Alabama, and has been very successful in creating jobs.

44. BENEFITS OF 504 LOAN
For Borrower - Receives long-term, fixed-rate financing at favorable interest rate.
Most recent 20 year 504 bond APR was approx 5.25% Fixed for 20 years
For Banker - Finances only 50% of project costs, while getting a first lien on all the assets.
The reason this loan program is so popular is because it is so beneficial to everyone involved. The borrower gets up to 90% financing with a long-term maturity, and saves money on interest due to the low fixed interest rate on the SBA portion.
The banker gets to make a very safe loan, with a low loan to collateral value ratio, and also helps the bank’s customer to get a favorable fixed interest rate on a portion of the project.

45. SBA Lending Resources WWW.SBA.GOV/FOR-LENDERS WWW.NAGGL.ORG