SBA Loan Programs General Overview Training SCORE Los Angeles Chapter September 21, SBA Loans - Fundamentals Andrew Ten, Lender Relations Specialist U.S. Small Business Administration – Los Angeles District Office

Discussion Outline Who is the SBA? What is an SBA Loan? Benefits of SBA Programs to Borrowers and Lenders General SBA’s Eligibility Requirements and Size Standard Major SBA Programs: 7(a), 504, and SBAExpress Basic Credit Requirements Loan Application Preparation 2 SBA Loans - Fundamentals

SBA History & Background The Small Business Administration (SBA) is a United States government agency that provides support to entrepreneurs and small businesses. The SBA was created on July 30, 1953, by President Eisenhower with the signing of the Small Business Act. The mission of the Small Business Administration is "to aid, counsel, assist and protect interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of the nation." 3 SBA Loans - Fundamentals

What is an SBA Loan? An SBA Loan is a business loan, not a personal loan or a grant. SBA Loans are guaranteed loans through a Lender. The amount guaranteed depends on the dollar amount of the loan and the specific program the lender may use. Typical Scenario: A lender will review an applicant’s business plan, financial information, character and credit history. The lender will make a decision to work with the business owner/member on a conventional lending basis or to seek an SBA guarantee to reduce their exposure. –Some reasons a lender will request an SBA guarantee is (1) collateral available does not meet conventional requirements, (2) term needed to repay the debt is not available conventionally, (3) type of business: either a start-up or a higher risk industry. 4 SBA Loans - Fundamentals

Benefits to Business Owners Purpose – provide financing to those creditworthy small businesses that do no qualify for conventional credit Benefits Small business receives financing Lender retains a customer and expands market share Up to 90% financing for commercial real estate transactions Longer term = smaller payment = qualified easier Full amortization and no balloon payments = save time, paper work, hassle and $$ Finance non-conventional and special-purpose credits, such as start-up businesses, business acquisitions, gas stations, car washes, restaurants, healthcare facilities, hotels/motels, auto shops, etc. 5 SBA Loans - Fundamentals

Benefits to Lenders Government guaranty of 50% to 90%: Reduces lender’s risk of loss Reduces lender’s capital requirement for its small business loan portfolio Allows increased market share 6 SBA Loans - Fundamentals

Primary Eligibility for SBA Loans To be eligible for an SBA business loan, a small business applicant must: 1)Be an operating business 2)Organized for profit 3)Located in the United States 4)Be small based on regulatory size requirements (13 CFR Part 121)(13 CFR Part 121) 5)Demonstrate a need for the desired credit 7 Balancing Member Business Loan Portfolios with SBA guarantees Exploring Member Business Loans with SBA guarantees

General SBA Eligibilities  Borrowing entities’ major shareholders are either U.S. citizens, permanent residents or legal aliens  SBA’s size standard: Net Income <= $5MM and Total Business Net Worth <= $15MM  Ineligible Businesses: Non-profit businesses Businesses engaged in lending Shopping centers, apartment buildings are not eligible Businesses located in a foreign country Business loans to individuals not lawfully in the United States Businesses selling through a Pyramid Plan Businesses deriving more than 1/3 gross annual revenue from legal gambling activities Businesses engaged in illegal activities Businesses which restrict patronage such as men or women only health clubs Government owned entities Businesses teaching, instructing religion or religious beliefs Businesses owned by persons of poor character Businesses in which the Bank or affiliates owns an equity interest Businesses providing prurient sexual material Businesses that have previously defaulted on Federal or Federal assisted financing Businesses primarily engaged in political or lobbying activities Speculative businesses 8 SBA Loans - Fundamentals

SBA Loan Program Overview SBA does not make direct loans to borrowers (except disaster assistance loans), but uses a network of SBA approved lenders (i.e. you) Again, SBA provides a loan guaranty only, backed up by the U.S. Government There are many SBA programs, but two major programs: 1.SBA 7(a) 2.SBA 504 programs 9 SBA Loans - Fundamentals

SBA 7(a) Guaranty Loan Program The SBA’s primary lending program. A regular 7(a) loan has a maximum loan amount available of $5,000,000 which the Agency guarantees 75%, or $3,750,000. If the loan amount is $150,000 or less, the Agency guarantees 85% Use of Proceeds: Purchase machinery & equipment Working Capital Leasehold Improvements Receivables & Inventory Refinance existing debt Acquisition/Construction of real estate Business acquisitions (purchase of business) 10 SBA Loans - Fundamentals

SBA 7(a) Guaranty Loan Program Maturities Based on use of proceeds & ability to repay Up to 10 years for working capital 7 to 10 years for machinery & equipment 25 years for real estate – maximum maturity Weighted average for multiple purposes Interest Rates Can be negotiated between lender and borrower Primarily based on WSJ Prime + Spread Other base rates include LIBOR 1-month + 3%, or SBA Peg Rate SBA Guidelines based on loan maturity & amount < 7 years: Max. Rate = Prime % >= 7 years: Max. Rate = Prime % Rates slightly higher for loans of $50k or less 11 SBA Loans - Fundamentals

SBA 504 Loan Program This is the 2 nd most popular and major SBA program. This program provides up to 90% financing Lender (no SBA guaranty) lends up to 50% secured with 1 st mortgage; SBA (through a Certified Development Corp.) guaranties (100%) finances up to 40% secured with a subordinate lien/2 nd mortgage on the assets being acquired; borrower typically provides 10% equity down payment The loan has a maximum SBA guaranty loan amount available of $5,000,000, but project size could be larger 12 SBA Loans - Fundamentals

SBA 504 Loan Program Use of Proceeds: Acquisition/Construction of commercial real estate, including land Purchase capital equipment Maturities 10 or 20 year fully amortized term (on SBA 2 nd ) Varies with the Lender 1 st, but usually is comparable to the term of the SBA 2 nd loan Interest Rates Below market fixed rate: 2 nd SBA/CDC is usually based on 10 year Treasury + margin (~2.5 – 3.0%) 1 st Lender is comparable in their rate, but usually slightly above SBA/CDC’s rate – can be based on any COF index 13 SBA Loans - Fundamentals

SBA 7(a) SBAExpress Lines of Credit Loan Purpose: short-term working capital Maximum Loan Amount: $350,000 Maximum Guaranty Percentage: 50% Term: up to 7 years 14 SBA Loans - Fundamentals

Basic Credit Criteria (5 Cs) Cash Flow Collateral Credit History Character Capacity 15 SBA Loans - Fundamentals

Profile Questions to ask… How long have you been in business? (A: 3 years or greater) What was your prior full year revenue? (A: $500K or greater) How much of a loan are you looking for? (A: $100K or greater) What was your Net Profit/Income for the prior year? (A: preferably at least 10% of requested loan amount) What is the loan for? –Building Purchase –Debt Refinance –Purchase Inventory –Expansion/Acquisition –Working Capital: (details) __________________________ 16 SBA Loans - Fundamentals

Minimum Information – Loan Application Up to 3-year business tax returns Up to 3-year personal tax returns (20% ownership or greater) Personal Financial Statement If you have or able to obtain: –Debt Schedule for all entities –Income Statement (P&L) and Balance Sheet for all entities (20% or greater) –Credit Report Consent Form from all guarantors –Purchase Agreement (if purchase) 17 SBA Loans - Fundamentals

Code of Federal Regulations (CFR): CFR Title 13, Parts 120 and 121CFR Title 13, Parts 120 and 121 Standard Operating Procedures (SOP) for loan originations: SOP (H)SOP (H) SBA Lender Resources: SBA Forms, SOP, Notices, and Loan Packages: Franchise Reviews/Questions: or SBA References 18 SBA Loans - Fundamentals

More Info & Questions? 19 SBA website: THANK YOU FOR YOUR TIME AND ATTENTION! ANY QUESTIONS? Andrew Ten Lender Relations Specialist| U.S. Small Business Administration – L.A. District Office 330 North Brand Blvd., Suite 1200, Glendale, CA Phone: | Fax: | “Aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns”