Working Capital and Contract Caplines Program. Caplines 2.0: New and Improved

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1 Working Capital and Contract Caplines Program Caplines 2.0: New and Improved

2 Topics for Today s Discussion Structural Changes Key Features for Working Capital Caplines Key Features for Contract Caplines Local Contact Information

3 Structural Changes Reduce 5 subprograms to 4: Working Capital CAPLines (formerly Standard Asset Based CAPLines and Eliminated Small Asset Based CAPLines, maximum line amount $200,000.) Contract CAPLines Seasonal CAPLines Builder s CAPLines Added option of delegated processing for PLP Lenders Application: Non-delegated: standard 7(a) application forms submitted to the LGPC. Delegated: PLP lenders will use SBA Forms 1919 and 1920 (SBA Express forms) as well as their own documents, including the Lender s Credit Memorandum rather than the standard 7(a) application forms (which are used for other PLP loans). E-tran submission for SBA approval is required.

4 Key Features of the Working Capital CAPLines program Maximum line amount $5,000,000 Maximum guaranty percentage 75% (over $150,000)/85% if $150,000 or less Maximum maturity increased from 5 to 10 years (except Builder s CAPLine, which is limited by regulation to 5 years), this matches the maturity for Working Capital term loans Finance short-term working capital/operating needs and some refinancing of existing lines: Proceeds must not be used to pay delinquent withholding taxes or similar trust funds (state sales taxes, etc.), or for floorplanning. In the event that Working Capital CAPLine proceeds are used to acquire fixed assets, lender must refinance the portion of the line used to acquire the fixed asset into an appropriate term facility no later than 90 days after lender discovers that the line was used to finance a fixed asset.

5 Key Features of the Working Capital CAPLines program Maximum Maturity Unlike SBA Express, Working Capital CAPLines does NOT require a term out period but: Final disbursement must occur far enough in advance of maturity so that a sufficient amount of time is available for the assets financed with the proceeds to be converted back to cash and available to make final payment at maturity. The date of final disbursement must be established in the Authorization and should be reflective of the time required to permit orderly repayment by the maturity date. When a balance exists on a CAPLine at maturity, the lender has the following options: Enforce final collection or commence liquidation of supporting collateral; Renew the line without SBA s guaranty; Renew the line, requesting SBA s guaranty (new application required if maturity has reached 10 years); Term out any outstanding balance, with SBA s concurrence. SBA s guaranty would remain in place but there could be no new advances; and/or The duration of the term out period may last two years, 5 years or longer depending on what the lender and SBA feel gives the borrower an opportunity to pay down the line. If

6 Key Features of the Working Capital CAPLines program Use of Proceeds Revised language permitting refinancing under Working Capital CAPLines: Conventional demand notes may be refinanced into a Working Capital CAPLines guaranteed loan; The refinanced portion cannot include any term debt or permanent working capital; Permanent working Capital is defined as twelve months or more. If the application includes the replacement of same institution short-term debt: The application must be submitted to the LGPC for processing; such applications may not be processed under delegated authority; and Additional documentation required: A copy of the note(s) and an explanation of the terms and conditions of any debt(s) being refinanced; A copy of the transcript of account; and A Borrowing Base Certificate with Aging of Receivables and List of Inventory, as necessary.

7 Key Features of the Working Capital CAPLines program - Collateral The lender does not need to seek all available assets for Working Capital CAPLines but: If the lender will disburse based on a borrowing base certificate (BBC), the lender must obtain a first lien position on the trading assets (A/R, INV, etc.) financed with the line. If not disbursing based on a BBC, Lender must obtain a first lien position on the working/trading assets (accounts receivable and inventory) financed with the line. If the working/trading assets are insufficient to provide a 1:1 collateral ratio, the lender also must take additional collateral to ensure there is a 1:1 collateral ratio. If business assets do not fully secure the loan, the lender must take available personal assets of the principals as collateral to ensure there is a 1:1 collateral ratio; To determine if there is a 1:1 collateral ratio, discount the available collateral based upon the Net Book Value presented on the borrower s financial statements.» The total line amount should be supported with accounts receivable at a maximum of 80% (after discounting a percentage for any ineligible receivables identified by reviewing the accounts receivable aging) and inventory no greater than 50%.» Machinery and equipment may be valued at 50% of Net Book Value or 80% with an Orderly Liquidation Value minus any prior liens.» Real estate can be supported at 80% of the value and the value must be determined in accordance with the requirements set forth in Chapter 4, Paragraph II.C of this Subpart; If the line will be secured by fixed assets and the valuation of fixed assets is greater than their depreciated value (net book value), an independent appraisal by a qualified individual must be obtained by the lender to support the higher valuation. (See Chapter 4, Paragraph II.C.3 of this Subpart.);

8 Key Features of the Working Capital CAPLines program Closing/Disbursement If a BBC is not used: Lender must conduct an credit review process including a site visit, collateral, cash flow and owner/guarantor analysis consistent with the lender s non-sba commercial lines of credit and; Lender must follow minimum monitoring requirements consistent with the lender s policies and procedures for its non-sba commercial lines of credit. Obtain borrower prepared financial statements and tax returns if the CAPLine amount is $1,000,000 or less and compiled, reviewed or audited financial statements and tax returns if the CAPLine amount is over $1,000,000, consistent with lender s policies governing its similarly sized, non-sba guaranteed commercial lines of credit; Proceeds from cash sales and receivable collections must pay down the line as collected.» If the lender has the borrower s deposit accounts, the lender is not required to utilize cash collateral accounts or other types of controlled accounts, but must follow its established procedures for its similarly-sized, non-sba guaranteed commercial lines of credit to monitor payments received.

9 Key Features of the Working Capital CAPLines program Closing/Disbursement If a BBC is used: The minimum monitoring requirements for Working Capital CAPLines are as follows: Monthly - Borrowing base certificate; Aging of accounts receivable/payable; and Inventory listing (if advanced against); Quarterly Borrower prepared financial statements; and Annually» If the Working Capital CAPLine is $1,000,000 or less, credit review including cash flow analysis, concentration analysis, collateral analysis, owner/guarantor credit review and annual site visit.» Accounts from any one customer that constitute more than 20% of the total outstanding receivables should not be included in the eligible borrowing base unless the account is a high rated public company, a Federal government account, the customer has a long-standing positive credit history with the borrower or the customer is a prime contractor performing on a Federal government contract.» If the account meets one of those four conditions, the lender does not need to obtain SBA s prior written concurrence to include the account above the 20% in the eligible borrowing base, but must include a written justification in the loan file.» If, however, the account does not meet one of the four conditions, then the lender must obtain SBA s prior written consent in order to include the account in the eligible borrowing base. Such requests must be sent to the LGPC.» If the Working Capital CAPLine is over $1,000,000, credit review including cash flow analysis, concentration analysis, collateral analysis, owner/guarantor credit review and annual field examination.» Accounts from any one customer that constitute more than 20% of the total outstanding receivables should not be included in the eligible borrowing base unless the account is a high rated public company, a Federal government account, the customer has a long-standing positive credit history with the borrower or the customer is a prime contractor performing on a Federal government contract.» If the account meets one of those four conditions, the lender does not need to obtain SBA s prior written concurrence to include the account above the 20% in the eligible borrowing base, but must include a written justification in the loan file.» If, however, the account does not meet one of the four conditions, then the lender must obtain SBA s prior written consent in order to include the account in the eligible borrowing base. Such requests must be sent to the LGPC.

10 Key Features of the Working Capital CAPLines program Level of Funds Control The level of funds control for a Working Capital CAPLine, whether a borrowing base certificate is used or not, is determined by the banking relationship the lender has with the borrower. If the lender has the borrower s deposit accounts, the lender is not required to utilize cash collateral accounts or other types of controlled accounts, but must follow its established procedures for its similarlysized, non-sba guaranteed commercial lines of credit to monitor payments received. If the lender does not have the borrower s deposit accounts, then the lender must utilize some form of controlled account as follows: The customers of the borrower can be instructed to send their remittances via joint payee checks payable to lender and borrower to the lender; or Lock box (bank account under lender control where borrower s customers remit payments for accounts receivable).

11 Key Features of the Contract CAPLines program Use of Proceeds Proceeds can be used to finance all costs (excluding profit), previously only labor and materials. Contract CAPLine proceeds may not be used for: permanent working capital, to acquire fixed assets, to pay delinquent taxes or similar funds held in trust (directly or indirectly), to finance a contract in which significant performance has already begun, for change of ownership Floor plan financing; to cover any mark-up or profit; to finance the performance of another contract or sub-contract; or in repayment of a different contract or sub-contract.

12 Key Features of the Contract CAPLines program Collateral Assignment of Contract Proceeds: Subject to the exception noted below, prior to initial disbursement on any Contract CAPLine, the entity the borrower has entered into the contract with must be advised in writing by both the lender and borrower that an assignment of the contract proceeds is required. Such assignment must be in place before any disbursement for a particular contract is made and include a provision for the lender s right to receive all payments from the third party. The lender must receive written acknowledgement from the third party. Exception to the Assignment of Contract Proceeds: An assignment of the contract proceeds may be foregone, if at least two of the following conditions are met: The term of the contract being financed is 12 months or less; A successful track record between the borrower and the contracting authority exists relative to the same or reasonably similar contracts. (The definition of a successful track record includes but is not limited to, any prior contractual arrangement between the subject parties, where the responsibilities of each party under the contract were met to the satisfaction of all parties to the contract.); Financial analysis of historical income statements and/or tax returns and pro-forma financial statements show that the applicant has a Debt Service Coverage ratio that exceeds 1:1; All contract proceeds are paid directly to the lender by the contracting authority or, in the instance where a performance bond is in place, a Funds Control (or escrow or third party servicer) procedure is implemented; or There is other available and worthwhile collateral pledged to secure the line by either the borrower or any owner/guarantor.

13 Key Features of the Contract CAPLines program Eligible Contracts/Purchase Orders A contract between a prime and subcontractor, a contract with Performance bonds, and a purchase order is eligible for financing under Contract CAPlines provided the lender satisfies the section 2 (a) on page 237 of the SOP (d) and satisfies the following: Prime and Subcontractor Contracts: a contract between a Prime and Subcontractor is eligible to be financed with a Contract CAPLine, if at least two of the following conditions are met: Both the Prime and the Subcontractor have favorable credit ratings based on an acceptable rating agency (e.g., Builders Industry Credit Association BICA ); There is a successful track record between the Prime contractor and the Subcontractor (borrower); There is a successful track record between the Prime contractor and the contracting authority; The Contract CAPLine amount is less than $300,000; The term of the contract is 12 months or less; The financial analysis of historical income statements and/or tax returns and pro-forma financial statements show that the applicant has a Debt Service Coverage ratio that exceeds 1:1; or There is other available and worthwhile collateral pledged by either the borrower or any owner/guarantor. Contracts with Performance Bonds: a contract requiring a Surety s performance bond may be eligible for a Contract CAPLine provided the lender perfects a UCC security interest in the contract proceeds. SBA recognizes the following conditions may be necessary to effectuate the transaction where a contract requires a Surety s performance bond: The lender s perfected UCC security interest in the contract proceeds will be subordinate to the cost reimbursement claim of the Surety; and The Surety may require that a funds control facility be executed. The funds control facility would disburse directly to suppliers and laborers. The contracting authority will remit contract proceeds directly to the funds control facility, which will remit payment to the lender. Purchase Orders under a Master Agreement: Purchase Orders (PO) may be substituted for a formal contract, provided the following conditions exist: The PO is issued to the borrower under a Master Agreement; and The combination of the PO and the Master Agreement constitute a binding agreement.

14 Local Contact Information For more information on the program, for questions about procedures and processes, or to receive training on the program for you or your institution, please contact your local SBA District Office. To find your local district office, visit