Financing Downtown Businesses

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1 Financing Downtown Businesses Presented by: David Kircher 1 Wisconsin Business Development Finance Corporation Certified Development Company Authorized to work with SBA 504 Program Fixed Asset Financing Gives Small Business Access to the Bond Market and Long Term Fixed Rate Financing Partner with Lending Institutions Experience with other Loan Programs WBA Economic Development Manual 1

2 Sources of Funding Equity Investment Personal Cash / Home Equity / 401K Friends & Relatives Total Standby Loans Angel Investors Venture Capital Bank Financing or Equivalent Conventional Loans Credit Enhanced Loans Govt. Programs What do lenders look for in the application? Lenders review what is referred to as the 5 C s of Credit when evaluating risks Character Capacity to repay Capital Injection Collateral Available Market Conditions 2

3 Conventional Lending Collateral Based Term often shorter than life of assets Current Pressures Examiners looking more closely at Portfolio Performance Concentration Decision Process Changes in Conventional Lending Following The Great Recession Requiring a better prepared borrower Better Plan More Financially Sound Requiring more Equity Concerned about value of collateral Hesitant to provide a fixed rate Looking to Credit Enhancement Programs 6 3

4 Credit Enhancement Programs Guarantees SBA 7(a) WHEDA Direct Funds / Subordinated Debt SBA 504 CDBG-ED Revolving Loan Funds Micro-loans Credit Enhanced Loan Programs Stress Cash Flow and Strength of Management over Collateral Provide financing for the life of the assets Geared to: Owner / Operators Owner Occupied (at least 51%) - Not investment properties 4

5 SBA 7(a) Loan Guarantee Lender provides the funds SBA provides a guarantee to the lender 85% guarantee for loans of $150M or less 75% guarantee for loans over $150M Maximum loan $5Million Maximum guarantee $3.75Million (including all SBA lending to business & affiliates) 9 SBA 7(a) Use of Loan Proceeds SBA loan proceeds may be used to finance any of the following: Working capital Furniture and fixtures Machinery and equipment Purchase of RE including building renovation Business Acquisition including Goodwill Refinancing of existing debt 10 5

6 SBA 7(a) Eligibility Small Business Applicant must be an operating for profit business that is located in the U.S. and is considered small business by SBA Size Standard based on industry, generally 500 employees or $7 million in average revenues. <$5MM in Net Income and <$15MM in Net Worth The applicant must also demonstrate the need for credit. Credit Elsewhere and Personal Liquidity Tests 11 SBA 7(a) Maximum Maturity and Interest Rates Maximum Maturity Working Capital 10 Years FFM&E Useful life (up to 15 years) Real Estate 25 years Interest Rates Variable Maturities < 7 years Base Rate % Maturities of 7 years or more Base Rate % 12 6

7 Collateral Requirements Primary reason for lenders to use the SBA 7(a)program is for Small Businesses that demonstrate repayment ability but lack adequate collateral to fully secure the loan. All available collateral must be pledged until the loan is fully secured on a liquidation basis. May include the pledge of personal assets (i.e. residence) Individuals who own 20% or more of a Small Business: Applicant must provide an unlimited full personal guaranty. 13 Equity Requirements No minimum requirement but lender must determine if the equity and pro forma debtto-worth are acceptable based on factors: Type of business Experience of management Equity injection may be borrowed only when applicant can demonstrate repayment of the personal loan from sources other than the cash flow of the business (e.g. spousal income) 14 7

8 SBA Express Max. loan amount to $350,000, 50% Guaranty Allows revolving loans up to 7 years Lender uses mostly their own forms Answers on credit in 36 hours or less 15 SBA Cap Lines Maximum SBA Guaranty % Over $150,000 75% $150,000 or less 85% Maximum Maturity: 10 years Short term working capital / operating needs Some refinancing of existing lines (demand notes) 16 8

9 WHEDA Programs: Small Business Guarantee (WSBG) Contractors Loan Guarantee (CLG) Neighborhood Business Revitalization Guarantee (NBRG) Agribusiness Guarantee (AGBIZ) Basic Eligibility Requirements Owner actively engaged in the business Unable to obtain conventional financing at reasonable terms Employ 250 or fewer full-time equivalent employees (no limit for NBRG) Must be located in Wisconsin Create or retain jobs 9

10 Use of Proceeds Purchase or improvement of land*, buildings*, machinery and equipment * Includes mixed-use properties Purchase inventory Working capital (revolving and permanent) Refinance existing debt that does not exceed 75% of the WHEDA guaranteed loan Fund soft costs not to exceed 5% of eligible project costs (including application and/or closing fees) Terms and Conditions Term Loans & Term Working Capital Loans Maximum term of guarantee is 15 years for fixed assets and 7 years for inventory and permanent working capital Maximum guarantee amounts range from $600,000 to $750,000, with no limit on maximum loan amount Revolving Working Capital Loans Maximum term of guarantee is 2 years for revolving line of credit Maximum guarantee amount of $200,000 10

11 WSBG General Requirements Expansion or acquisition of an existing small business Start-up of a day care business Start-up business located in a vacant storefront in the downtown area of a rural community WSBG Requirements for Mixed Use Projects Refers to buildings that include both commercial and residential use Business can occupy as little as 25% of the total building space No requirement for business to ever increase their percentage of space they occupy 11

12 NBRG Requirements for Developers Experienced developer with at least two successful projects If mixed use project, development must contain some portion of commercial space Developer does not need to occupy any portion of the property developed SBA 504- Certified Development Company Loan Program Decreased Injection Borrower can Conserve Working Capital Credit Enhancement decreases exposure improves collateral position Competitive, Long-term, Fixed rates Competitive Advantage 24 12

13 SBA 504 Eligible Use of Funds Land, Building, and Equipment Project Related Eligible Soft Costs Professional fees cost of appraisal & environmental reports interim interest Expenditures incurred within 9 months of the date of application can be included in project costs. Refinance of amortizing debt ONLY in conjunction with a significant expansion Ineligible 504 Project Costs Working Capital, Inventory and other current assets Goodwill and other intangible assets 25 SBA 504 Eligibility Active small businesses: <$15 million net worth <$5.0 million average profit No sales limitations Personal Liquid Asset Test (>20% Ownership) $0 to $250,000 Liquid assets can not exceed 2x the financing package. $250,001 to $500,000 Liquid assets can not exceed 1.5x fin. package. $500, Liquid assets can not be more that 1x the financing package

14 504 OCCUPANCY RULES FOR NEW CONSTRUCTION: 60% MUST BE OCCUPIED BY THE ACTIVE SMALL BUSINESS AT ALL TIMES 20% CAN BE LEASED SHORT TERM (UP TO 3 YRS ) Active s ma ll business must ha ve p la ns to occupy some portion of this space within 3 yea rs. 20% CAN BE LEASED LONG TERM Note: 504 project proceeds can not be used for build-outs of tenant space OCCUPANCY RULES FOR ACQUISITION OF EXISTING BUILDING: 51% MUST BE OCCUPIED BY THE ACTIVE SMALL BUS INESS AT ALL TIMES 49% CAN BE LEASED LONG TERM ABOVE ALSO APPLIES FOR EXPANSION OF EXISTING FACILITIES In both cases, active small business must lease 100% of the building from the landlord (eligible passive entity, typically an LLC) and can sublease the portions of the building noted above to third parties 28 14

15 Term 10 or 20-year debenture based upon useful life of the assets acquired. Bank Loan - minimum maturity of 7 yrs when WBD sells a 10-year debenture. Bank Loan - minimum maturity of 10 yrs when WBD sells a 20-year debenture. Balloons notes are possible. 29 Structure & Contribution Eligibility: 10% down for existing small businesses in multi-use properties Add 5% if a new business Add 5% if special purpose Entity Existing New Business or special purpose New Business and special purpose Bank 50% 50% 50% WBD 40% 35% 30% Borrower 10% 15% 20% TOTALS 100% 100% 100% 30 15

16 Borrower s contributionfrom where? Personal or business cash Real estate / land equity If owned for 2 years, appraisal surplus can be used Borrowed funds: Seller take back, loans against personal or business assets If borrowers contribution loan is secured by project assets, loan must be for the term of the debenture Leverage Loan Funds 31 Revolving Loan Funds Rural Communities & Counties Over 190 communities in WI have an RLF Communities have received $90MM repaid from CDBG-ED loans, expect $130MM Current availability exceeds $50MM Average Loan Size - $75M Rules of access similar to CDBG-ED Use of Funds, Jobs & Matching Funds Entitlement Communities Set aside HUD dollars with rules similar to RLFs Private Revolving Loan Funds Contributions from Chambers, local banks & businesses with locally established rules 32 16

17 Contact Information Wisconsin Business Development Finance Corp. Address: W229 N1433 Westwood Drive, Suite 206 Waukesha, WI Website: Phone: (262) Fax: (262) David Kircher Senior VP 33 Thank You! Any Questions? 34 17

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