Utah Center for Neighborhood Stabilization Introduces

Transcription

1 A summary for Utah financial institutions Utah Center for Neighborhood Stabilization Introduces Utah Small Business Growth Initiative In addition to the Utah Center for Affordable Housing s (UCAH) efforts to stabilize neighborhoods, Utah Center for Neighborhood Stabilization (UCNS) is pleased to announce the creation of another non-profit aimed at promoting a healthy small business economy to help stabilize Utah s neighborhoods. With the creation of the Utah Small Business Growth Initiative (USBGI), UCNS will once again utilize their relationships with financial institutions to help stabilize neighborhoods by helping small businesses who cannot currently access credit. USBGI and partner banks will provide the financing that small businesses need to grow and create or maintain jobs and ultimately stabilize neighborhoods. (UCNS is the parent company that houses the various neighborhood stabilization companies, each with separate goals but a similar mission of promoting neighborhood stabilization in Utah.) USBGI will lend to any Utah business but will target small businesses in low and moderate income areas, minority and women owned businesses, and other underserved small businesses. USBGI has two loan programs to accomplish this mission: the Loan Guarantee Program and Loan Participation Program. These programs provide enhancements to loans that may otherwise not be bankable under current lending criteria. The enhancements will include providing a loan guarantee for up to 80% of the loan, or participating in the loan by purchasing participations or making loans in subordinate positions. This is an ideal program for Community Reinvestment Act managers which invest in and support the same target markets. USBGI will partner with multiple business assistance organizations that support and have close relationships with small businesses statewide. These organizations are free or low cost and provide a wide variety of business counseling services to local small businesses. The UCNS staff has 35 combined years of banking and financial analysis experience, over three years of experience in managing public funds, and has been recognized for their innovative and creative approaches to stabilizing neighborhoods. They have been able to effectively manage public funds with minimal administrative costs. Utah Small Business Growth Initiative Highland Dr. Salt Lake City, UT 84106

2 A summary outlining the loan guarantee program Utah Small Business Growth Initiative (USBGI) LOAN GUARANTEE PROGRAM Enabling small businesses to obtain the funding necessary to grow and expand their business by providing lenders with security through a partial guarantee Utah Center for Neighborhood Stabilization 2200 Highland Dr. #200 Salt Lake City, UT For more details, please contact: Michael Plaizier or Sidni Johnson

3 2 Utah Small Business Growth Initiative 1. What is USBGI s Loan Guarantee Program? USBGI s Loan Guarantee Program enables small businesses to obtain term loans or lines of credit to help them grow and expand their businesses. The program provides a lender with the necessary security, in the form of a partial guarantee, for the lender to approve a loan or line-of-credit. The table below describes key credit and loan characteristics of USBGI s Loan Guarantee Program. Key Credit & Loan Characteristics What kinds of borrowers are eligible to participate? What sizes of loans are eligible? What types of loans are eligible? How can loan proceeds be used? Who negotiates the terms of the loan? All Utah businesses are eligible to apply; however, we target statewide small businesses with one or more of the following characteristics: 1. Located in low-to-moderate income neighborhoods 2. Located in underserved communities 3. Women or minority owned businesses Lenders should target an average borrower size of 100 employees or less and not exceed a maximum borrower size of 750 employees. Corporations, partnerships, and sole proprietorships are eligible, including non-profits and cooperatives. USBGI Policy Guidelines provide specific guidance on certain borrowers who are prohibited from participating in this program. Should target an average principal amount of $100, 000 to $500,000. Exceptions may be approved by USBGI on a loan by loan basis. Varies, but usually term loans and lines of credit. Small Business Administration (SBA) guaranteed loans may not be enrolled in the USBGI Loan Guarantee Program. The unguaranteed portion of SBA loans may be included. For any business purpose, including, but not limited to start-up costs, working capital, business procurement, franchise fees, equipment, inventory, as well as the purchase, construction, renovation, or tenant improvements of an eligible place of business that is not for passive real estate investment purposes. Restrictions apply to refinancing and other uses; please refer to the USBGI Policy Guidelines for additional details. Interest rates, maturity, collateral and other loan terms are negotiated between the borrower and the lender. In some cases, loan terms are subject to approval by USBGI. In many cases, USBGI and lender will discuss and negotiate loan terms and guarantee options prior to reaching agreement to approve the loan and issue a guarantee.

4 Utah Small Business Growth Initiative 3 2. How Does USBGI s Loan Guarantee Program Work? USBGI sets aside funds in a dedicated reserve account to guarantee a specified percentage of each approved loan. USBGI Financial Institution Small Business 3. Operating Mechanics Operating Mechanics What kinds of lenders are eligible to participate? Who originates loans in this program? Who has underwriting responsibility? How are these loans monitored? Any insured depository institution, insured credit union, or community development financial institution, as defined in section 103 of the Riegle Community Development and Regulatory Improvement Act of USBGI will screen lenders to demonstrate sufficient commercial lending experience and financial and managerial capacity to participate. Participating lenders and other eligible lenders originate loans and apply to the program for guarantee approval. In certain instances, USBGI will permit borrowers to seek pre-approval from the guarantee program before negotiating with prospective lenders. Lenders are responsible for underwriting the loans initially. USBGI will review and approve guarantee applications that are submitted by the lenders; upon approval, a commitment letter is issued to the lender outlining the terms of the guarantee. USBGI has a program to monitor both the repayment progress of borrowers and the servicing performance of participating lenders.

5 4 Utah Small Business Growth Initiative What kinds of guarantee fees may be charged? What is the guarantee term? What percentage of the loan can the guarantee cover? What happens in the case of a default? How does a reserve fund work? What if a single lender depletes all of the reserves? What is USBGI s liability? What is the role of the USBGI? What is the role of a lender? What is the role of the trustee and the reserve fund? Origination and annual utilization fees are determined by USBGI to defray the cost of program operations and ensure sustainability. The guarantee fee is typically 4% of the loan amount. Varies from loan but a 1-5 year term is typical. Coverage is determined by the USBGI and lenders, but may not exceed 80% of loan losses; a lender must have at least 20% of its own capital at risk in each loan. If a borrower defaults on a loan, a lender may submit a claim to USBGI in accordance with the terms of the guarantee agreement. The guarantee agreement will specify the responsibilities of the lender in pursuing available remedies to collect unpaid principal and interest prior to submitting a claim. Money is set aside in a reserve fund to pay anticipated claims on defaulted loans. The reserve fund is maintained by a trustee outside of the lender; invested conservatively, as dictated by the state s investment guidelines. Interest earnings may be used to replenish the reserve and/or pay for some of the administrative costs. USBGI will establish limits on the amount of loans any one lender can originate in the program and/or the amount of credit exposure each dollar in reserves can support (also known as a leverage ceiling). USBGI s liability is limited to the funds in the reserve fund. Issues the loan guarantee to the lender. Establishes contracts, budgets, reporting requirements, databases to support the program, and other administrative elements. Conducts outreach to inform lenders and trade associations of the existing program; introduces the program by letter or in person, distributes press releases and/or speaks at industry or small business conferences. Originates, processes, and services loans. Submits guarantee applications to USBGI for review/approval, and obtains assurances of eligibility from each borrower. Invests conservatively as dictated by USBGI s investment guidelines. Pays claims in instances of loan defaults. Supplements administrative costs through interest earnings. 4. Contacts For more details, please contact: Michael Plaizier or Sidni Johnson Utah Center for Neighborhood Stabilization 2200 Highland Dr. #200 Salt Lake City, UT 84106

6 A summary outlining the loan participation program Utah Small Business Growth Initiative (USBGI) LOAN PARTICIPATION PROGRAM Enabling small businesses to obtain the funding necessary to grow and expand their business by partnering with financial institutions to provide attractive small business loans Utah Center for Neighborhood Stabilization 2200 Highland Dr. #200 Salt Lake City, UT For more details, please contact: Michael Plaizier or Sidni Johnson

7 2 Utah Small Business Growth Initiative 1. What is USBGI s Loan Participation Program? The USBGI s Loan Participation Program enables small businesses to obtain medium to long-term financing, usually in the form of term loans, to help them grow and expand their businesses. Loan Participation Program is structure in two ways: purchase transactions, also known as purchase participation, in which USBGI purchases a portion of a loan originated by a lender; and companion loans, also known as co-lending participation or parallel loans, in which a lender originates a senior loan and USBGI originates a second (usually subordinate) loan to the same borrower. This program enables USBGI to act as a lender, in partnership with a financial institution lender, to provide small business loans at attractive terms. The table below describes key credit and loan characteristics of USBGI s Loan Participation Program. Key Credit & Loan Characteristics What kinds of borrowers are eligible to participate? What sizes of loans are eligible? What types of loans are eligible? How can loan proceeds be used? Who negotiates the terms of the loan? All Utah businesses are eligible to apply; however, we target statewide small businesses with one or more of the following characteristics: 1. Located in low-to-moderate income neighborhoods 2. Located in underserved communities 3. Women or minority owned businesses Lenders should target an average borrower size of 100 employees or less and not exceed a maximum borrower size of 750 employees. Corporations, partnerships, and sole proprietorships are eligible, including non-profits and cooperatives. USBGI Policy Guidelines provide specific guidance on certain borrowers who are prohibited from participating in this program. Should target an average principal amount of $100, 000 to $500,000. Exceptions may be approved by USBGI on a loan by loan basis. Varies, but term loans are the most common. Small Business Administration (SBA) guaranteed loans may not be purchased in loan participation; however, USBGUI may purchase participations in loans that are subordinate to, or make its own direct loan subordinate to, an SBA guaranteed loan. For any business purpose, including, but not limited to start-up costs, working capital, business procurement, franchise fees, equipment, inventory, as well as the purchase, construction, renovation, or tenant improvements of an eligible place of business that is not for passive real estate investment purposes. Restrictions apply to refinancing and other uses; please refer to the USBGI Policy Guidelines for additional details. For purchase transactions, interest rates, maturity, collateral and other loan terms are negotiated between the borrower and the financial institution lender, though USBGI may seek to approve terms prior to closing. For companion loans, USBGI and the financial institution lender negotiate interest rates, maturity, collateral, and loan terms with the borrower.

8 Utah Small Business Growth Initiative 3 2. How Does USBGI s Loan Participation Program Work? USBGI s Loan Participation Program works in one of two ways: 1) purchase transaction loans, whereby USBGI purchases a participation in a loan that is issued by a financial institution lender; or 2) co-lending participation, companion loans, or parallel loans, whereby USBGI makes a loan alongside a financial institution lender loan. Typically USBGI s loan is subordinate to the lender s loan in terms of collateral priority. USBGI USBGI Financial Institution Financial Institution Small Business Small Business 3. Operating Mechanics Operating Mechanics What kinds of lenders are eligible to participate? Who originates loans in this program? Who has underwriting responsibility? Any insured depository institution, insured credit union, or community development financial institution, as defined in section 103 of the Riegle Community Development and Regulatory Improvement Act of USBGI will screen lenders to demonstrate sufficient commercial lending experience and financial and managerial capacity to participate. For purchase transaction loans, the financial institution lender originates the loan, and USBGI purchases a portion of the loan from the financial institution lender. For companion or parallel loans, the financial institution lender originates the primary loan, and USBGI originates the secondary loan. For purchase transaction loans, the financial institution lender underwrites the initial loan. USBGI will underwrite its purchase participation but may gain further information from the lender s credit decision. For companion loans, the financial institution lender and USBGI each evaluate the application based on their own credit criteria, though USBGI may request the financial institution lender s credit analysis.

9 4 Utah Small Business Growth Initiative How are these loans monitored? What kinds of fees may be charged? What is the loan participation term? What percentage of the loan can USBGI participate? What happens in the case of a default? What is USBGI s liability? What is the role of the USBGI? What is the role of a lender? USBGI has established a program to monitor both the repayment progress of borrowers and the servicing performance of participating lenders. USBGI will periodically reevaluate the value of collateral in issued loans and make sure that the collateral is properly insured. Application and origination fees are determined by USBGI to defray the cost of program operations and ensure sustainability. Fees may range from 0% to 3% of the loan amount. Varies from loan to loan. Typically, USBGI s participation is no shorter than the term of the lender s loan. USBGI will target purchases or issue loan participations from 10% to 30% of the total loan amount; a private lender must have at least 20% of its own capital at risk. An agreement between participating lenders and USBGI will define each party s responsibilities in situations involving default, charge-off, and liquidation. If USBGI has a subordinate position, the lender has the first claim to all recoveries until its losses are covered. USBGI bears losses up to the amount of its participation. USBGI may also participate in costs of workout as negotiated with the lender. The lender has no recourse against USBGI in case losses exceed recoveries. Conducts outreach to inform lenders, small businesses, and trade associations of the program. Verifies the eligibility of individual loans, which includes confirming borrower eligibility requirements and certifying that proceeds will be used for acceptable business purposes. Has direct lending responsibilities, including underwriting loan participation purchases and companion loans and ongoing loan monitoring and reporting. Establishes an agreement with the lender specifying who is responsible for servicing, modifying, reporting, and collecting loans. For participation loans, the senior financial institution lender generally has few or no responsibilities to the subordinate USBGI loan unless spelled out in an inter-creditor agreement. In purchased participations, the financial institution lender s role is written into the participation agreement. In each case, the financial institution identifies potential opportunities for USBGI s participation. 4. Contacts For more details, please contact: Michael Plaizier or Sidni Johnson Utah Center for Neighborhood Stabilization 2200 Highland Dr. #200 Salt Lake City, UT 84106

10 09/11/12 Utah Small Business Growth Initiative (USBGI) Frequently Asked Questions FAQs Utah Center for Neighborhood Stabilization 2200 Highland Dr. #200 Salt Lake City, UT 84106

11 2 Utah Small Business Growth Initiative 1. What is the Utah Small Business Growth Initiative (USBGI)? In July, 2012 the State of Utah Division of Housing and Community Development announced its intent to contract with the USBGI to administer $12,800,000 in State Small Business Credit Initiative (SSBCI) funds. 2. What is the State Small Business Credit Initiative (SSBCI)? The SSBCI is a Federal program administered by the Department of Treasury which was funded with $1.5 billion to strengthen state programs that support private financing to small businesses and small manufactures. In conjunction with private financing, the SSBCI is expected to help spur up to $15 billion in lending to small businesses and manufacturers that are not getting the loans or investments they need to expand and create jobs. 3. What types of lenders are eligible to participate? Any insured depository institution, insured credit union, or community development financial institution. 4. Who originates the loan? Participating lender and other eligible lenders originate loans and apply to the USBGI for participation or guarantee approval. 5. What kinds of guarantee fees are charged? Origination and annual utilization fees are determined by USBGI to defray the cost of the program operations and ensure sustainability. The guarantee fee will typically range from 3% - 4%. 6. What is the guarantee term? Varies from loan to loan but a 1-5 year term is typical. 7. What percentage of the loan can the guarantee cover? Coverage is determined by the USBGI and lenders, but may not exceed 80% of the loan amount. A lender must have at least 20% of its own capital at risk in each loan. 8. What kinds of rates and fees are charged for loan participations? Application and origination fees are determined by USBGI to defray the cost of the program and ensure sustainability. Fees may range from 0% to 4% and interest rates may range from 6% to 20% depending on the risk associated with the loan. A Subsidiary of the Utah Center for Neighborhood Stabilization UCSN

12 Utah Small Business Growth Initiative 3 9. How are the loans monitored? The lenders will provide USBGI with regular reports on both the repayment progress of borrowers and any changes in financial condition. They would also provide regular covenant reporting of borrowers to USBGI. 10. Who has underwriting responsibility? Lenders are responsible for underwriting the loans initially. USBGI reviews and approves guarantee or participation applications. Upon approval, a commitment letter is issued to the lender outlining the terms of the guarantee/participation. 11. What types of borrowers are eligible to participate? Lenders should target an average borrower 100 employees or less and not exceed a maximum borrower size of 750 employees. Corporations, partnerships, and sole proprietorships are eligible, including non-profits and cooperatives. Lenders should target, but are not restricted to, small businesses statewide with one or more of the following characteristics: o Located in a low-to-moderate income neighborhood. o Located in underserved communities. o Women or minority owned businesses. 12. What types of borrowers are not eligible to participate? The borrower is an executive officer, director, or principal shareholder of the lender. The borrower is a member of the immediate family of an executive officer, director, or principal shareholder of the lender. The borrower is a related interest of an executive officer, director, or principal shareholder, or member of the immediate family. A business engaged in speculative activities that develop profits from fluctuation in price rather than through normal course of trade, such as wildcatting for oil and dealing in commodities futures, unless those activities are incidental to the regular activities of the business and part of a legitimate risk management strategy to guard against price fluctuations related to the regular activities of the business. A business that earns more than half of its annual net revenue from lending activities; unless the business is a non-bank or non-bank holding company Community Development Financial Institutions. A business engaged in pyramid sales, where a participant s primary incentive is based on the sales made by an ever-increasing number of participants. A business engaged in activities that are prohibited by state or federal law. A business engaged in gambling enterprises. A principal owner of the business has been convicted of a sex offense against a minor.

13 4 Utah Small Business Growth Initiative 13. What sizes of loans are eligible? Lenders should target a loan size of $100,000 to $500,000. Exceptions may be approved by USBGI on a loan by loan basis up to $5,000, What types of loans are eligible? Loan types vary, but are usually term loans and lines of credit. 15. How can loan proceeds be used? For any business purpose, including, but not limited to start-up costs, working capital, business procurement, franchise fees, equipment, inventory, as well as the purchase, construction, renovation, or tenant improvements of an eligible place of business that is not for passive real estate investment purposes. 16. The loan cannot be used to: Repay a delinquent federal or state income taxes unless the Borrower has a repayment plan in place with the relevant taxing authority. Repay taxes held in trust or escrow, e.g. payroll or sales taxes. Reimburse funds owed to any owner, including any equity injection or injection of capital for the business continuance. To purchase any portion of the ownership interest of any owner of the business. Place under protection of the approved state program prior debt that is not covered under the approved state program and that is or was owed by the borrower to the lender or to an affiliate of the lender. Refinance a loan previously made to that borrower by the lender or an affiliate. (see exception in #17) Enroll the unguaranteed portion of SBA guaranteed loans. 17. Under what circumstances may a financial institution lender use SSBCI funds to support a new extension of credit or the purpose of satisfying a prior obligation to the same financial institution or an affiliate? Financial institution lenders are generally prohibited from refinancing an existing outstanding balance or previously made loan, line of credit, extension of credit or other debt owed by a small business borrower already on the books of the same financial institution (or an affiliate) into an SSBCI program. However, a financial institution lender may use SSBCI funds to support a new extension of credit that repays the amount due on a matured loan or line of credit when ALL of the following conditions are met: The new loan or line of credit includes the advancement of new monies to a small business borrower (excluding closing costs). A Subsidiary of the Utah Center for Neighborhood Stabilization UCSN

14 Utah Small Business Growth Initiative 5 The new credit supported with SSBCI funding is based on a new underwriting of the small business s ability to repay and a new approval by the lender. Proceeds from the new credit may only be used to satisfy the outstanding balance of a loan or a line of credit that has already matured or otherwise termed and the prior debt was used for an eligible business purpose, as defined by SSBCI policy guidelines. The new credit has not been extended for the sole purpose of refinancing existing debt owed to that same financial institution lender. The limitation on refinancing does not prohibit a financial institution lender from originating a new loan under an approved program and subsequently refinancing the same loan under any approved program. Additionally, the limitation does not prohibit a financial institution lender from enrolling or refinancing previously made loans from another, non-affiliated financial institution into an approved program. 18. What is SSBCI s definition of passive real estate investment? SSBCI considers loan proceeds to be used for passive real estate investment purposes when the proceeds from the loan or investment are used by an eligible small business to invest in real or personal property acquired and held primarily for sale, lease, or investment. 19. May SBA-guaranteed loans or other federally guaranteed or insured loans be enrolled in the USBGI program using SSBCI funds? The SSBCI prohibits enrolling the unguaranteed portion of SBA guaranteed loans. 20. Who negotiates the terms of the loan to be guarantee d? Interest rates, maturity, collateral and other loan terms are negotiated between the lender and the borrower. In some cases, loan terms are subject to approval by USBGI. 21. Who can I contact for more information? For more details, please contact: Michael Plaizier or Sidni Johnson Utah Center for Neighborhood Stabilization 2200 Highland Dr. #200 Salt Lake City, UT 84106