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 SectorSBA Headquarters – Washington D.C.Makes and Implements PolicyCenters Delivery ProgramsSBA Regular Guaranty Processing Center – Citrus Heights, CAPLP & SBA Express Processing Center – Sacramento, CALoan Servicing Center – Little Rock, ARNational Guaranty Purchase Center – Herndon, VASBA Pittsburgh District OfficeServes as liaison between Centers and LendersMarketing & Outreach of SBA Programs
4 THREE PRINCIPALS IN AN SBA GUARANTEED LOAN Small BusinessBankSBAThe 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 loansEquity/Downpayment requirements may be more flexible than traditional financingThe primary benefit to small business is the abilityto get financing in the amount needed, and for theterm needed, when it might not otherwise beavailable. Most of our loans are long-term loans.
6 Situations Where an SBA Guaranty May Be Necessary Startup BusinessesLack of CollateralLower Than Normal Downpayment/EquityLonger Term/Lower Payments Required to Meet Debt Coverage RequirementsRiskier Industries (Entertainment, High-Tech, Service, Retail)Uneven Historical Revenues or ProfitsTighter Than Normal Debt CoverageChange of Ownership/ManagementLending LimitsReliance on Projections
7 Benefits of SBA Lending Increase Your Loan PortfolioEliminate missed opportunitiesSmall Business has highest growth potentialImprove Risk ManagementSBA Lending Has an Inverse Relationship to EconomyBroaden Your Customer BaseProvide Better ServiceLonger terms, lower monthly paymentsLower DownpaymentsSBA Loans Meet CRA RequirementsAllows your bank to be more competitive
8 Benefits of SBA Lending (cont.) Increase Profitability - SBA Loans can provide good return on pricingRelationship Building and Cross Sale OpportunitiesOpens a source of cash to your bankSecondary Market (Premium & Servicing Income)Career Building OpportunitiesNiche LendingExperienced SBA Lenders are in DemandOffer Specialty Loan Programs
9 How Does SBA Work with Lenders? Loan Guaranties – SBA 7(a) Loan Program UmbrellaSBA Guarantees or Insures a percentage of the risk to the BankPursuant to Eligibility, Underwriting, Closing and Servicing RequirementsIn accordance with the SBA Loan AuthorizationAssumes a Prudent Lending StandardIn the event of a default, once primary assets are liquidated, Lender can request that SBA honor or “purchase” its guarantySBA reimburses the approved percentage of loss to the Bank50% to 90% Guaranty Depending on ProgramGap Financing – SBA 504 ProgramSBA guaranties subordinate lien financing to a Bank LoanCertified Development Companies act as SBA’s AgentOnly Available for Fixed Asset FinancingProvide 30% to 40% of Project Financing in subordinate lien position to primary lenderBank provides a conventional first mortgage/first lien loan at 50% of cost/value of fixed asset financed
10 SBA Lending Authority750 Agreement Provides the Basis for SBA GuaranteeRegular 7(a) LenderSBA Performs Complete and Independent Eligibility Review & Credit AnalysisCLP LenderSBA Performs a Credit Review of Lender’s credit analysisLender Prepares Draft of SBA Loan AuthorizationSBA Relies Heavily on Lender’s Analysis and RecommendationPLP LenderSBA Performs only a brief eligibility reviewCredit Decision is delegated to the lenderLender executes SBA Loan Authorization on behalf of SBAImmediate approval thru SBA E-Tran systemContract & 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 TransactionSaves 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 CodesTypically Based on Number of Employees or Annual ReceiptsRetail - $7 Million (3 year average)Manufacturing EmployeesWholesale EmployeesService - $7 Million (3 year average)Alternate Size StandardTangible Net Worth <$15MMAverage 2 Year Net Income < $5MMSize Is Based on the Combined Operations of an Applicant and All Its AffiliatesAffiliates are businesses that have common ownership, common management or contractual relationships
14 Ineligible Businesses Non-ProfitsPassive Holder of Real Estate (Landlords)Businesses Located in a Foreign CountryBusinesses Engaged in Gambling< 1/3 of annual gross sales from legal gambling eligibleCriteria for lottery income is based on commissionBusinesses Which Restrict Patronage for other than capacityBusinesses with an Associate on parole, probation or incarceratedBusinesses Engaged in Promoting ReligionCooperativesEquity Interest by LenderBusinesses Providing Prurient Sexual MaterialBusiness or Associate which defaulted on a Federal loan resulting in a loss to the governmentIncludes Government Guaranteed Student LoansDoes not include tax obligationsSpeculative businesses
15 Eligibility (Cont.) Utilization of Personal Resources Applies to all 20% or more ownersLimitations 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 greaterLiquid assets in excess of these limits must be injected and reduce the requested SBA financing accordinglyLiquid Assets include: cash, CD’s, marketable securities, unassigned CVLIDoes not include: closely held stock, retirement accounts, real estate, pledged as collateral >6 months.Liquid Assets cannot be pledged as collateral in lieu of injectionSTAY TUNED – THIS RULE MAY BE ELIMINATED SHORTLY!
16 Eligible Passive Company Formerly “Alter Ego” RuleException to Restriction on Passive ConcernsOperating Company Must be Ultimate Beneficiary of the Financial AssistanceEPC Rule No Longer Requires Commonality of Ownership Between the Passive and Operating CompaniesEPC Must Use Loan Proceeds to Acquire or Lease, and/or Improve or Renovate Real or Personal Property that It Leases to the Operating CompanyEPC and OC Must Meet Size StandardsLease Must Be In WritingTerm of lease must at least equal term of loanAssignment 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 businessFranchise Agreements and FTC disclosures must be reviewed by SBA or Bank depending on program usedConsult SBA Franchise Findings ListAll franchises are listed onMust first determine SBA eligibility – either internally as a PLP or with SBA ReviewIf eligible, must have appropriate certifications from franchisor
19 Other Eligibility Issues Prior Criminal ConvictionsMust be disclosed on SBA Form 1919 Borrower Information Form and SBA Form 912 Personal History StatementSingle or remote in time minor offenses can be cleared by SBA District OfficeFelonies will require fingerprint check and clearance only by SBA HeadquartersNon-US CitizensMust be permanent resident aliens ORManagement must have citizenship or permanent resident status and operated business for at least 1 year ANDLoan must be 100% collateralized by assets in the U.S.CAIVRS – Credit Alert Verification Reporting SystemNow REQUIRED to be used for loans processed under delegated authority to identify delinquent federal debtor prior loss to governmentSAM/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 ProceedsReal EstateAcquire land and/or buildingsConstruction, Renovation or ImprovementsPurchase of Fixed Assets (M&E,F/F)InventoryWorking CapitalIneligible Proceeds UsePayment to an AssociateOfficer, director or owner of more than 20%Floor Plan FinancingPayment of Delinquent Taxes
21 Debt RefinancingSBA does not refinance debt that is on reasonable terms.Must justify unreasonable terms to refinance existing debt with SBABalloon notes, demand notes, and business credit card debt are all considered by SBA to be on unreasonable termsLender must evidence at least a 10% improvement in cash flow (i.e. reduction in debt service) thru the proposed refinanceYou 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 relatedHome 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 EstateFor acquisitions and refinances, 51% of total square footage must be owner occupiedSBA now allows exterior space actively used in business to be included in the calculationFor construction, must be at least 60% immediate owner occupancy, and 80% long term owner occupancyNo SBA Loan Proceeds can improve leased spaceCommon improvements are allowed
23 Financing Changes of Ownership Asset Purchases or Stock Purchases AllowedIn case of stock purchase, business must be co-borrower with stock purchaserMust be a complete buyout of the departing or selling ownerMust provide a benefit to the businessBusiness Valuation must be completed by Lender or Third Party depending on size of transaction and level of goodwillIf amount financed less appraised value of fixed assets < $250k, then Lender may perform its own valuationIf 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 requiredIf 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 ApplicantExperience and Depth of ManagementStrength of the BusinessProforma Balance SheetWorking Capital AdequacyPast Earnings, Projected Cash Flow and Future ProspectsNote trends in revenue and cash flowAbility 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 ModelPre-Screened thru SBA E-TranHelps to Have Business DUNS NumberCurrent Minimum Score is 140If Application passes pre-screen, can submit application thru E-Tran for expedited approvalIf 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 flowEvidence 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 HistoryLenders must verify financials vs. income taxes thru IRS Form 4506 processOwner/Guarantor Analysis – Based on lender’s policy for similar sized non SBA loansDetermine if Equity and Proforma debt to worth are acceptableRequire 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 flowOCF 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 & HistoryManagement Capabilities and ExperienceSpread of Proforma Balance SheetMost 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 includingCurrent RatioDebt/Net WorthOther ratios significant to industry (turnover ratios, etc.)Collateral Adequacy AssessmentDiscussion/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 BasisGenerally will not provide 100% financing for a new business or business purchaseDebt/Worth is primarily tool for determining adequacy of equityAdverse Equity Ratio Can Be Offset By:Pledge of outside collateralExperienced ManagementStandby DebtPersonal Debt May Be Considered Equity:On Full StandbyOutside 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 typeLenders 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 refinancedLenders may also secure trading assets if it does so for conventional loansLife 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 amountDetermination of fully secured includes:Real Estate – 85% of net book or appraised value minus prior liensNew Equipment – 75% of net book or 80% of orderly liquidation appraisal minus prior liensUsed equipment – 50% of net book or 80% of orderly liquidation appraisal minus prior liensTrading assets 10% of current book valueIf 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 pledgedSBA does not require lender to take a lien on personal residence when less than 25% equityLife 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 & Caplines85% on loans up to $150,000.75% on loans over $150,000.SBA Express50% GuarantyInternational Trade & EWCP90% GuarantySBA 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 $5,000,000SBA Express$350,000 exceptExport Express $500,000504$5,000,000 Debenture LimitThere 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 ORUse maximum maturity for asset comprising the largest percentage of the loanMany 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 IndexWall Street Journal Prime RateLIBOR Base RateSBA Optional Peg RatePrime 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 PrimeLenders 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 ChangesSimplified 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 feesIf 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 PortionGuaranty Fee Due to SBA within 90 days of approval if longer term loan > 12 monthsGuaranty Fee Due to SBA within 10 days of approval of short term loans of 12 months or lessSBA 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 Loan75% guaranty ($375,000)3% fee ($11,250)$800,000 Loan75% guaranty ($600,000)3.5% fee ($21,000)$3,000,000 Loan75% 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 amountFees must be reasonable and customaryCap of 3% on loans of $50,000 and lessCap of 2% on first $1MM and ¼% thereafterMaximum fee of $30,000Must still be disclosed on SBA Form 159
39 The SBA 7(a) & Caplines Application SBA Form 1919 – Borrower Information FormSBA Form 1920 – Lender’s Application for GuarantySBA Form 4a – Collateral Schedule – No longer required form but best practice for collateral listingSBA Form 159 – Compensation Agreement (if agent involved)SBA Form 912 – Personal History Statement (if criminal conviction)IRS Form 4506 – Request for Tax TranscriptSBA Form 1846 – Statement Regarding Lobbying
40 SBA Express Reduced SBA Guaranty of 50% Bank uses own documentation and underwriting processCan charge fees reasonable and customary for conventional loans of same size and typeCan use for revolving lines of credit
41 Caplines Contract Caplines Funds all contract costs as contract is completedNo longer requires assignment of contract in all casesSeasonal CaplinesFinance seasonal increases in accounts receivable and inventoryBuilder’s CaplineFunds construction or substantial renovation of residential or commercial buildings for resaleWorking Capital CaplinesFund short term working capital needsUp to 10 year maturityGoverned by a borrowing base certificate or must be fully collateralized on a 1:1 collateral ratioAdvances allowed up to 80% of A/R and 50% of Inventory
42 TYPICAL 504 PROJECTPrivate-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 ProgramPurpose: 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 LOANFor 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 yearsFor 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.