1. 7(a) Loan Guaranty Program
April 10, 2019
Presenter – Betty Hill

2. 7(a) LOAN GUARANTY PROCESSING CENTER (LGPC)
WHO ARE WE?
… AND WHAT DO WE DO?
7(a) LOAN GUARANTY PROCESSING CENTER (LGPC)

3. LGPC mission statement
The mission of the Center is to efficiently process 7(a) loan guaranty applications and to provide assistance and oversight, as necessary, to lenders before and after submission.

4. 7a LGPC locations 6501 Sylvan Road, Suite 122 Citrus Heights, CA 95610
Phone: (877)
262 Black Gold Blvd
Hazard, KY 41701
Phone: (606)
General Questions:
Phone: (877)
Loan Mods (prior to full disbursement):

5. LGPC Leadership Team Gregory Prichard Betty Hill Annette May Vacant
Center Director
Betty Hill
Assistant CD, Policy
Annette May
Deputy Center Director
Vacant
Deputy Center Director, Hazard
Customer Service Departments
Loan Processing Activities
Theresa “Teri” Hendrix
Loan Modification Supervisor
Eric Aylor
Loan Processing Team Supervisor
Kimberly Bury
Loan Processing Team Supervisor
Bill Reed
Loan Processing Team Supervisor
Brendell Givens
Loan Processing Team Supervisor
Customer Service Liaison/
7a Questions
Kristi Harris
LP Support Supervisor
eTran Support

6. Lgpc workflow Lgpc workflow
The completeness of the submission package will impact the efficiency of the processing timeline.

7. Who Must use the lgpc Who Must use the lgpc Non-Delegated Lenders
All 7(a) Loans (except SBA Express and Export Express)
Delegated Lenders (In the following scenarios)
Refinance of Same Institution Debt (SID), refinancing a 504 Loan, when using “no longer meets the needs of the business” for refinance and change in ownership debt refinance within 6 months
Financing of an OREO property
A Delegated Lender that is making a personal loan to the borrower for the required equity injection
Where there is a potential conflict of interest with the lender
An owner of 10%, or more, is an SBA employee, former SBA employee, or Member of Score or Congress
When there is known environmental contamination or on-going remediation at the property
All 7a Loans (except SBA Express)

8. Who Must use the lgpc Who Must use the lgpc
Standards of Conduct Committee approval required – Examples include:
A SBA employee, or the household member of an SBA employee, is a sole proprietor, partner, officer, director, or stockholder with 10% or more interest in Applicant
Former SBA employee who has been separated from SBA for less than 1 year is an employee, owner, general partner, managing member, attorney, agent, owner of stock, officer, director, creditor or debtor of the Applicant
A member of Congress, or an appointed or employee of the legislative or judicial branch of the Federal Government, or a Small Business Advisory Council, or a SCORE volunteer is a sole proprietor, general partner, officer, director, or stockholder with 10% or more interest, or a household member of such individual, of the Applicant
Who Must use the lgpc
All 7a Loans (except SBA Express)

9. WHAT SHOULD YOU SUBMIT TO THE LGPC?
… AND HOW DO YOU DO IT?

10. SBA One or E-TRAN Origination
Submission methods
SBA One or E-TRAN Origination
Create an application
Answer required questions
Verify data
Attach documents
Submit
Status will change from “Application in Process” to “Review Reviewer 1”
If the status is anything other than “Review Reviewer 1” the file will not transmit to the LGPC.
For questions regarding SBA One, contact Colson’s SBA One support services at  or , Call Option 5
For questions regarding E-TRAN, contact Ryan Gerald at or Glenn Hannon at
For general submission questions contact

11. What needs to be included?
For submissions to the Center
Small & CA Loans
Regular 7(a)
Form 1919 (complete Borrower Application) X
Form 1920 (complete Lender Application)
Lender Credit Memorandum (see detail page)
Personal Financial Statements for all principals owning 20% or greater
912s (where required) *
USCIS Verification (where required) *
Business Financials (Interim + 3 prior yrs.) including debt schedule
Projections with reasonable assumptions for start-ups and change of ownership
Affiliate Financials (Interim + 3 prior yrs.)
What needs to be included?
* We suggest submitting the following forms to the appropriate Agencies as early in the application process as possible to avoid any unnecessary delays in the application process: Form 912 Statement of Personal History and Form G-845

12. What else should be included?
For submissions to the Center
Small Loan & CA Loans
Regular 7a
Copies of notes, security agreements, leases, or other documentation evidencing the debt to be refinanced X
Transcripts for Same Institution Debt (SID)
Copy of Business Purchase Agreement
Seller Financials signed by Seller (Interim + 3 prior yrs.)
Internal or External Business Valuation per SOP guidelines
Real Estate Purchase Agreement
Real Estate Appraisal (OREO properties only)
Franchise Documents, if applicable (see next page for detail)
Management Agreements
Detailed Listing of Collateral
Lender’s Environmental Questionnaire
Draft Loan Authorization (delegated Lenders only)
What else should be included?
* We suggest submitting the following forms to the appropriate Agencies as early in the application process as possible to avoid any unnecessary delays in the application process: Form 912 Statement of Personal History and Form G-845

13. Who needs to complete the form 1919?
For ALL Regular 7(a) Processing including Small & CA Loans
For a sole proprietorship, the sole proprietor
For a partnership, all general partners, and all limited partners owning 20% or more of the equity of the firm, or any partner that is involved in management of the applicant business
For a corporation, all owners of 20% or more of the corporation and each officer and director
For limited liability companies (LLCs), all members owning 20% or more of the company and each officer, director, and managing member
Any person hired by the business to manage day-to-day operations
Make sure that the current form is used and that each 1919 is signed and dated.
Make sure that each 1919 is initialed, signed and dated.

14. What should be covered in your Credit Memo?
Do the loan terms match the 1920 and your Draft Authorization?
Addressed financial analysis including repayment ability from operations?
Is the request for SBA funds clearly articulated?
Have you addressed Credit Elsewhere?
Have you clearly addressed the eligibility of each note to be refinanced? (e.g. unreasonable terms, 10% savings)
Have you addressed the specific collateral that will secure the proposed loan? If so, have you done a liquidation value evaluation to determine whether the loan is fully secured?
Discussed business and management history?
How about the personal history, experience and credit history of the principals?
If repayment is based upon projections, have you addressed why they are reasonable?
Changes of Ownership – why is it good for the business? Experience of new owner, recent business trends, seller financing standby terms?
Discussion of all project costs including sources of funds. If other financing is involved, has it been addressed?
Equity injection and need for working capital
What should be covered in your Credit Memo?

15. Primary Screen-Out Reasons
… AND HOW TO AVOID THEM

16. The top five categories
The Top 5 categories account for 75% of the total Screen 2nd Quarter 2018

17. NumBer One… Credit Memo Incomplete Collateral Shortfall not addressed
Life Insurance not addressed
Derogatory credit not addressed including
Delinquent Federal Debt
Use of Proceeds Unclear
Need for Working Capital not addressed
Schedule of Collateral Missing or Incomplete
Shareholder debt not placed on standby or not addressed
Draft Authorization conflicts with Credit Memo
Notes to be refinanced not clearly identified
Justification for refinance not properly addressed (Benefit to the Borrower)
Justification for Projections not addressed
Liquidity of 20% owners, their spouses and minor children not addressed
All the items listed here are screen out reasons that relate directly to items that should be clearly addressed in a Lender’s Credit Memorandum. Collateral: vehicle information; 1st lien on assets purchased

18. 2nd on the list… Financial Statements Missing/Incomplete
Affiliate financial statements missing/incomplete
Projections missing or assumptions not included
Borrower’s historical financial statements missing/incomplete
Personal Financial Statement Incomplete
Debt schedule missing/incomplete or doesn’t match balance sheet debt
Pro-forma Balance Sheet missing/incomplete
Seller financial statements missing/incomplete
Make sure that current YTD Business Financials are no older than 120 days from submission to SBA
Make sure the Personal Financial Statement is no older than 90 days from submission to SBA
All the items listed here are screen out reasons that relate directly to items that should be clearly addressed in a Lender’s Credit Memorandum. Collateral: vehicle information; 1st lien on assets purchased

19. 3rd on the list… Forms 1919 and 1920
Forms are missing, incomplete or unsigned
Ownership identified does not total 100%
Other SBA loans are not identified on 1920
Use of Proceeds on 1920 is incomplete or doesn’t match credit memo
Trade Name (dba) left blank when applicable on 1920
Payment Amount and Rate Adjustment Frequency missed on 1920
All the items listed here are screen out reasons that relate directly to items that should be clearly addressed in a Lender’s Credit Memorandum. Collateral: vehicle information; 1st lien on assets purchased

20. 4th on the list… Debt Refinance Copy of Notes to be Refinanced Missing
Transcripts for Same Institution Debt Refinance Missing
Benefit to Business Not Stated
Loan to be Refinanced on Reasonable Terms Not Met
10% Improvement to Cash Flow Not Met
Same Collateral Position Required When Refinancing
Certification that Credit Card was Used for Business Purposes Missing and provide copy of most recent Credit Card statement
All the items listed here are screen out reasons that relate directly to items that should be clearly addressed in a Lender’s Credit Memorandum. Collateral: vehicle information; 1st lien on assets purchased

21. 5th on the list… Change of Ownership
Asset Purchase/Stock Purchase Agreement Missing
Equity injection not addressed/adequate
Third party Independent Business Valuation Missing/Unacceptable
Lender’s Internal Business Valuation Missing/Unacceptable
Change of Ownership Appears Ineligible
Payment to Associate
Finance amount not supported by business valuation
All the items listed here are screen out reasons that relate directly to items that should be clearly addressed in a Lender’s Credit Memorandum. Collateral: vehicle information; 1st lien on assets purchased

22. CHANGE OF OWNERSHIP

23. Change of Ownership
An asset purchase will be deemed a change of ownership and must comply with all of the Change of Ownership requirements if the Applicant(s) is purchasing all or substantially all of the assets of the Seller’s business and is continuing the operations of the Seller’s business.
Seller may not remain as an officer, director, stockholder or key employee of the business (short transitional period may be allowed)
Small business must either be the Borrower or a Co- Borrower
H. Change of Ownership (13 CFR § ).
1. An Applicant(s) (and any individual co-Applicant as permitted under this paragraph), may use loan proceeds for a change of ownership, whether the change of ownership is accomplished through a stock purchase (including a stock redemption) or an asset purchase, only under the circumstances described under this paragraph. An asset purchase will be deemed a change of ownership and must comply with all of the requirements of this paragraph if the Applicant(s) is purchasing all or substantially all of the assets of the Seller’s business and is continuing the operations of the Seller’s business.
a) The change of ownership will promote the sound development and/or preserve the existence of a small business;
b) Change of Ownership Between Existing Owners: A change of ownership between existing owners may be financed under the following circumstances:
i.An existing owner(s) of the small business is purchasing the ownership interest of another owner(s), resulting in 100% ownership of the business by the purchasing owner(s); or
ii.The small business is redeeming the ownership interest of an owner(s), resulting in 100% ownership of the small business by the remaining owner(s);
c) Change of Ownership Resulting in a New Owner: A change of ownership resulting in a new owner may be financed under the following circumstances:
i.A small business is purchasing 100% of the ownership interest in another business;
ii.An individual(s) who is not an existing owner is purchasing 100% of the ownership interest in a small business;
iii.A small business is acquiring another small business through an asset purchase; or
iv.An Employee Stock Ownership Plan (ESOP) or equivalent trust is purchasing a controlling interest (51%) in the employer. (13 CFR § (b)).
2. The seller may not remain as an officer, director, stockholder or key employee (an employee who manages daily operations, e.g. overseeing a department or a division, not a clerical staff position) of the business. (13 CFR § ) If a short transitional period is needed, the small business may contract with the seller as a consultant for a period not to exceed 12 months including any extensions. When the purchaser is an ESOP or equivalent trust and is acquiring a controlling interest (51 percent or more) in the employer business, the seller may stay on as an owner, officer, director, stockholder or key employee of the company; however, any seller who remains as an owner, regardless of percentage of ownership interest, must provide their guaranty in accordance with the requirements of Chapter 4, Paragraph II.A. of this Subpart.
3. An SBA-guaranteed loan cannot be made solely to an individual. The small business must be either the Borrower or a Co-borrower as follows:
a) In a change of ownership under section V.H.1.b).i. or V.H.1.c).ii. above, the small business and the individual owner(s) must be co-borrowers. In addition, the Note must be executed, jointly and severally, by both the individual(s) who acquires the ownership interest(s) and the small business whose ownership interest is being acquired. If the small business denies liability for the debt based on an alleged failure of consideration under applicable state law, SBA may deny liability on its guaranty.
b) In a change of ownership under section V.H.1.b)ii. above, the small business must be the Borrower and the Lender may require the remaining owner(s) to be Guarantor(s) in accordance with the requirements for personal guaranties set forth in Chapter 4, Paragraph II of this Subpart. In a change of ownership under section V.H.1.c)i. or c)iii. above, the acquiring entity may be the Borrower or the acquiring entity and the small business being acquired may be Co-borrowers.
4. The Lender must comply with the requirements for IRS verification identified in Chapter 5 of this Subpart.
5. If the Borrower will be acquiring the small business’s real estate in a separate transaction with a non-SBA guaranteed loan, the SBA loan must receive a shared lien position (pari passu) on the real estate with the non-SBA guaranteed loan. This provision does not apply if the business real estate is being financed as part of a 504 project.

24. Change of Ownership Change of Ownership Between Existing Owners:
A change of ownership between existing owners may be financed under the following circumstances:
An existing owner(s) of the small business is purchasing the ownership interest of another owner(s), resulting in 100% ownership of the business by the purchasing owner(s)
The small business is redeeming the ownership interest of an owner(s), resulting in 100% ownership of the small business by the remaining owner(s)

25. Change of Ownership “Creeping Control”
“SBA intentionally removed the prohibition on “creeping control” from the SOP with the original rewrite of the (5) in August 2008 because as long as the remaining owners ended up with 100% of the ownership of the business, SBA did not care how it was allocated after the purchase.  That was a business decision that was left up to the business owners. 
6. The following changes of ownership are not eligible:
a) A non-owner who is purchasing less than 100% of the ownership interests in the business, except for eligible ESOP purchases; or
b) An existing owner who is purchasing the ownership of another existing owner that will not result in 100% ownership of the business by the purchaser.
7. SBA considers a change of ownership to be a “new” business because it will result in new, unproven ownership/management and increased debt unrelated to business operations.
8. The Lender’s loan documentation must include:
a) A current business valuation (not to include any real estate) by the Lender or an independent third party hired by the Lender with proven experience in business valuations. (See Chapter 4 of this Subpart for SBA’s business valuation requirements.)
b) A site visit of the business being acquired. The Lender must document in its loan file the date of the site visit as well as comments.
c) A real estate appraisal for commercial real estate that meets SBA’s requirements.(See Chapter 4 of this Subpart for SBA’s appraisal and valuation requirements.)
d) An analysis as to how the change of ownership will promote the sound development and/or preserve the existence of the business. If the analysis cannot support that the change of ownership will be in the best interests of the business and its continued, successful operations, then the loan request must not be submitted to SBA for its guaranty.
e) Business, stock, and asset purchase agreements.
f) Evidence that all assets, including transferable licenses (i.e. liquor license) conveyed as a result of purchase are properly secured as collateral by Lender.
9. Intangible Assets: An SBA-guaranteed loan may be used to finance a change of ownership that includes intangible assets (including, but not limited to, goodwill, client/customer lists, patents, copyrights, trademarks, intellectual property, and agreements not to compete) as long as it is supported by an independent business valuation that complies with the requirements of Chapter 4 of this Subpart.
a) The “purchase price of the business” includes all assets being acquired such as real estate, machinery and equipment, and intangible assets.
b) The value of the intangible assets is determined by either the book value as reflected on the business’s balance sheet, a separate appraisal for the particular asset, or the value of the business as identified in the business valuation minus the sum of the working capital assets and the fixed assets being purchased.
c) If any of the loan proceeds will be used to finance intangible assets, the amount must be specifically identified in the Use of Proceeds section of the application and the Authorization.

26. Change of Ownership Change of Ownership Resulting in a New Owner:
A change of ownership resulting in a new owner may be financed under the following circumstances:
A small business is purchasing 100% of the ownership interest in another business
An individual(s) who is not an existing owner is purchasing 100% of the ownership interest in a small business
A small business is acquiring another small business through an asset purchase
An Employee Stock Ownership Plan (ESOP) or equivalent trust is purchasing a controlling interest (51%) in the employer.

27. EQUITY INJECTION

28. Equity Injection Start-Up
At a minimum, SBA requires an equity injection (borrower contribution) of no less than ten (10) percent of the total project costs for a start-up business.
SBA consider a business to be a “start-up” for the purpose of determining equity injection when it has been in operation (i.e., generating revenue from intended operations) for up to one year.
Total project costs include all costs required to become operational, regardless of the source of funds.
If the borrower is obtaining a term loan for working capital, it is considered part of the total project cost.
If the borrower is obtaining a separate line of credit, it is not considered part of the total project costs. There should be adequate working capital built into the project. The separate line of credit is to be used for ongoing operations.

29. Equity Injection Change of Ownership
SBA requires an equity injection of no less than 10 percent of total project costs.
Seller debt can be used to meet the injection requirement only if it is on full standby for the life of the SBA loan and it does not exceed half of the required equity injection.
The borrower can not make interest payments on the seller debt. Full standby requires that no principal or interest payments are made.

30. Equity Injection Change of Ownership - Partner Buyout
Significant changes to SOP (J) were made to this policy through SBA Policy Notice effective April 3, 2018.
In the event the Lender is unable to document that both (1) and (2) on the next slide are satisfied, the remaining owner(s) must contribute cash in the amount of at least 10% of the purchase price of the business, as reflected in the purchase and sale agreement.

31. Equity Injection Change of Ownership - Partner Buyout
In order for a 7(a) loan to finance greater than 90% of the purchase price of a partner buyout:
the remaining owner(s) must certify that he/she has been actively participating in the business operation and held the same ownership interest in the business for at least the past 24 months (Lender must include in the credit memorandum confirmation that the borrower has made the required certification and retain such certification in the loan file); and
the business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership.

32. Equity Injection Partner Buyout Questions for Requirement 1:
Does the certification have to be submitted to the LGPC with the application?
No, the lender must include in the credit memorandum confirmation that the borrower has made the required certification and retain such certification in their loan file.
What if the remaining owners have change their percentage of ownership in the past 24 months?
As long as the ownership interest has increased it is acceptable. The ownership interest cannot have decreased.
What if one remaining owner has been actively participating in the business for 24 months and one has not?
All remaining owners must meet the requirement or they must contribute cash in the amount of at least 10% of the purchase price of the business.

33. Equity Injection Partner Buyout Questions for Requirement 1:
Is an interim balance sheet acceptable if it is not the current quarter?
Yes, an interim balance sheet is acceptable.
Can a real estate or equipment appraisal value be used to calculate the debt-to-worth ratio?
No, the ratio must be based on the historical balance sheets.

34. Equity Injection Acceptable Injection Sources:
Cash that is not borrowed.
Cash that is borrowed through a personal loan to the business owner with repayment from a source other than the cash flow of the business.
Assets other than Cash - Lenders must carefully evaluate the value of assets other than cash that are injected by owners. An appraisal or other valuation by an independent third party is required if the valuation of the fixed assets is greater than the depreciated value (net book value). A valuation of the fixed assets provided as part of a business valuation will not meet these requirements.
Standby debt - Only debt that is on full standby (no payments of principal or interest for the term of the SBA guaranteed loan) may be considered as equity for SBA’s purposes. A copy of the note must be attached to the standby agreement.

35. Equity Injection Unacceptable Injection Sources:
Value or cost of education
Funds that are borrowed and do not meet the exception noted on the prior slide.

36. LENDER RESOURCES

37. SBA.GOV

38. SBA.GOV …FOR PARTNERS
Hover over the Lenders box and click on 7(a) Loan Program

39. SBA.GOV …FOR PARTNERS
Scroll to the bottom of the page to Loan Servicing and Processing Centers

40. SBA.GOV …LGPC
Sba.gov …LGPC

41. Thank You!