How did the SBA come about? − −The SBA has a long history. Federal lending to businesses was a direct result of the Great Depression of the 1930s. To encourage growth, the Reconstruction Finance Corporation was formed in 1932 for lending to all businesses. − −Once World War II started, highly lucrative Defense Contracts were given to large corporations. To help small business compete, the Smaller War Plants Corporation was was set in − −After the war the SWPC was dissolved and the Office of Small Business assumed many of the activities that the SBA undertakes today. During that time, the OSB focused on educating small business by printing brochures and providing counseling. − −Then the Small Defense Plants Administration was formed during the Korean War. It would refers small business’s to RFC for working on government contracts. − −In 1952, the RFC was abolished and the US Small Business Administration was formed by the Small Business Act of 1953 as proposed by President Dwight Eisenhower. History
Objective What does the SBA do? − −The main goal of the SBA is to help small businesses start, grow and sustain in the form of Government Contracts or provide support to access capital using Government Guarantees. − −The SBA monitors and supports small business development through its various programs. − −It protects the interests of small businesses by liaising with other Government Agencies.
How does the SBA help small businesses? − −Access to credit − −The SBA offers various lending programs to small businesses. These programs cover everything from microloans to larger loans − −The SBA helps business owners by providing technical assistance and training & counseling − −Government Contracts − −The SBA provides assistance to small businesses in identifying opportunities to obtain government contracts. The SBA also has a bonding program where it provides 70% - 90% guarantee on bonds required for contracts − −Venture Capital − −The Small Business Investment Program invests long term capital in privately held small business. For every $1 raised by SBIC from a private investor, SBA provides $2 of debt capital − −Disaster Recovery Loans − −SBA helps small businesses affected by disasters in purchasing real estate, equipment, etc. through Disaster Loans Objective
SBA’s Loan Programs − −The SBA offers various lending programs that help small business gain access to credit. − −The SBA does not lend directly. It partners with various banks, credit unions, not for profit intermediary lenders, etc. to provide financing. − −The SBA provides US Government Guarantees on loans made by lenders. − −The key SBA guaranteed loan programs are: 7 (a) Loan Program CDC/ 504 Loan Program Microloan Program Disaster Assistance Loan Program Objective
Introduction — The name of this loan program was taken from Section 7(a) of the US Small Business Act, which authorizes the SBA to make loans to all ELIGIBLE small businesses. − −The 7(a) is SBA’s largest and most commonly used lending program. − −Existing businesses and start-ups can gain funding that they may not be eligible for through conventional means. − −The 7(a) is also SBA’s most flexible loan program, in that funds can used for a variety of general business needs. − −In 2012, the SBA approved loans worth $15.5 Billion under the 7(a) program. This means 44,000 Loans were approved under 7(a). 7(a) Loan Program
Introduction — The SBA itself does not provide loans. It does however, guarantee a portion of a loan made by another lender, provided that the loan is structured per SBA’s requirements. − −The SBA guarantees 85% of the loan amount for loans up to $150,000 and 75% of the loan amount for loans above $150,000. − −The maximum Loan amount under the SBA 7(a) program is $5,000,000, of which the SBA will guarantee up to 75% of the loan amount, or $3,750,000. 7(a) Loan Program
Eligibility − −The apply for a 7(a) loan, the business must meet the following criteria defined by the SBA: − −The business should be operating in the US and be a for-profit enterprise − −A business should qualify as a Small Business per SBA’s size standards. − −SBA uses the NAICS of the business to determine the size of a business Size is based on Gross Revenue or Number of Employees − −For example, for NAICS Code (Hotels & Motels), the maximum Gross Revenue should not exceed $30 MM. Further, generally for businesses in the manufacturing industry, the number of employees should not exceed 500. − −The SBA has also defined certain ineligible businesses. These broadly include Government owned entities, lending institutions, life insurance companies, etc. 7(a) Loan Program
Uses of Proceeds What can the loan be used for? 1.Purchase Real Estate – Property & Land 2.Refinance 3.Purchase Equipment 4.Working Capital 5.Inventory 6.Lease Hold/Property Improvements 7.Construction Loan Amount How much can you borrow? 1.The maximum that can be borrowed is $ 5 MILLION If a borrower has an existing 7(a) loan of $5 MM, they cannot apply for another 7(a) loan. Instead the Green SBA 504 program could be used to obtain funding. 2.No minimum amount – Average Loan Size was in 2012 was $330,000 Program Features 7(a) Loan Program
Interest Rates SBA has specified the Maximum spreads on base rates that can charged depending on maturity: *This refers to the Prime rate printed in Wall Street Journal (3.25%) Guarantee Fee SBA charges a fee for guaranteeing loans (only on the guaranteed portion): MATURITYMAX RATE < 7 yearsWSJ Prime* % > 7 yearsWSJ Prime* % Loans with Maturity < 1 year0.25% Loans with Maturity > 1 year, Up to $150,000 $150,000 - $700,000 $700,000 and above If guarantee amount exceeds $1 Million 0% 3% 3.5% 3.75% Program Features 7(a) Loan Program
Maturity Maturity period is decided based on the remaining useful life of the pledged asset. Prepayment There is no prepayment penalty on loans with maturity of less than 15 years. For loans with maturity of 15 years or more, the prepayment penalty is: This has been defined by the SBA and cannot be changed by the Lender. MAX MATURITY Real Estate Equipment Working Capital 25 yrs 10 yrs 7 yrs YEARPENALTY 15% of prepaid amount 23% 31% Program Features 7(a) Loan Program
Introduction − −The SBA mandates that lenders collect extensive information relating to the Borrower. This means that information regarding the business and the business owners is required for the application. − −The SBA gives great importance to the ability of the individual borrower to manage the business effectively. This means that “Unconditional Personal Guarantees” are required from anyone who owns 20% or more of the business. − −Further, if these individuals own 20% or more in another business, SBA may require an “Unconditional Corporate Guarantee” from these Affiliates as well. − −The maximum amount that any one individual can personally guarantee is $5 million. Application Process
How can you be ready? − −Having the following information ready, before approaching a lender, will significantly reduce the time spent in processing your application. Information for the Business: − −Tax Returns for the last three years − −Latest Interim Financial Statements − −Cash Flow Projections and Assumptions for two years − −Business Plan Information for the Guarantors (all who own 20% or more): − −Personal Tax Returns for the last three years − −Latest Personal Financial Statement − −Latest Bank Statements − −Resume − −Debt Schedule – loan balance, int. rate, monthly pmt. amt. Application Process
1. Borrower Approaches LENDER Directly or through an INTERMEDIARY 2. Establish Initial Eligibility Business & professional background, collateral details, purpose of loan, etc. 3. Letter of Interest Term Sheet detailing pricing, covenants & requirements 4. Underwriting & SBA 7(a) Loan Packaging Preparing SBA Forms & Gathering Information 5. Submission of Application to SBA* & SBA’s Analysis of the Package 6. SBA issues Authorization Loan Closing Requires input from the Borrower / Owner * PLP Lenders do not submit applications to the SBA, instead they can authorize directly Represents the process undertaken by the lender Application Process
Procedure Description − −The lender can be approached directly or through an intermediary/broker. − −You will be asked questions regarding your business, professional background, collateral details such as age, location, use, etc. This will help establish initial eligibility. − −Next, the information (as shown in the previous slide) is received, a preliminary assessment of the application is undertaken. This helps ascertain whether the application will be approved by the SBA and what is the SBA likely to require. Based on this, a Letter of Interest is issued. − −Once the borrower agrees to all terms and conditions, the application moves to the underwriting. Here a thorough analysis of the business, collateral, management ability etc. is carried out. Additionally, the borrower signs various required SBA 7(a) forms for the application package. − −The SBA further scrutinizes the loan application once they receive it. It is normal for the SBA to request more information at this time. As mentioned earlier, PLP lenders are authorized by the SBA to take the final credit decision. − −After all of the SBA’s questions have been answered satisfactorily, the SBA issues an Authorization. With this authorization the bank can move to close the loan. Application Process
− −The fact that loans are guaranteed by the SBA reduces the risk that the lender undertakes. The lender in-turn transfers this benefit down to the borrower. This results in several benefits for the borrower: − −Lenders are more willing to accept higher LTVs (Loan to Collateral Value), i.e. they are more willing to make larger loans for the same amount of collateral. − −SBA Fees and closing costs are generally built in as part of the project costs. Therefore, the borrower does not have to pay for these expenses out of pocket. − −There is a cap on the interest rate that can be charged depending upon the size of the loan and the collateral. − −Longer term and lower equity contributions than conventional loans. Benefits of the 7(a) Loan Product
Who are the big players? The fact that loans are guaranteed by the SBA reduces the risk that the lender undertakes. Majority of the small business lending is done by larger commercial banks like Wells Fargo, US Bank National Association, JP Morgan Chase. Lender No. of Loans Gross Approval Amt. Wells Fargo Bank, National Ass 3,173 $ 1,239,840,500 U.S. Bank National Association 1,661 $ 524,937,600 JPMorgan Chase Bank, National 4,338 $ 511,949,200 Live Oak Banking Company 489 $ 462,912,700 The Huntington National Bank 2,557 $ 416,844,800
Lender Synopsis Though the SBA loan programs and particularly the 7(a) program offer many benefits to both small business borrowers and lenders, lenders must be prepared. Here are a few reasons why: 1. The 7(a) loan is paper/ labor intensive. Apart from the several forms that are required, this loan package must be supported by a large volume of information. 2. Less freedom for the lender – there are strict restrictions on interest rates, loan cap and stringent guidelines. 3. Incase of a default, the lender must first liquidate all pledged collateral. Only after this is done and the lender has satisfied the SBA of a genuine default, will the SBA compensate the lender for the outstanding amount.
7(a) Loan Program Advantages to Lenders − −The general benefits of lending using SBA programs applies to lending using the 7(a) Program. The key benefits are: − −Significantly reduced exposure – typically SBA guarantees 75%, which means only 25% exposure − −SBA’s strict guidelines mean that the lender must undertake a higher standard of Due Diligence / Risk Management − −Secondary market trade – there exists an active secondary market for the Guaranteed Portion of the 7(a) loans. This can further reduce exposure and be a good source of additional / non-interest cash flow. − −Opportunity for smaller lenders/ community banks.
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