#orangesince1984 Today s Discussion Value in using the CAPLines program to provide larger LOCs with SBA s full guaranty W/C CAPLines = most widely use so we ll cover in most detail - Underwriting - Monitoring when using a borrowing base certificate or full collateralization - Properly renewing lines - Servicing - Etc. 2 Reminders CAPLines loans are subject to all regular loan requirements as well as CAPLines-specific requirements AND Although not clear in SOP, SBA has advised that CAPLines $350,000 NOT eligible for abbreviated processing based on acceptable credit score CAPLines have specific collateral requirements without regard to loan size 3 1
Revised CAPLines Program 4 CAPLines sub-programs with special criteria for each - Working Capital - Contractor - Seasonal - Builder s SBA made major changes to CAPLines program in 2011 after expiration of statute that increased SBA Express maximum to $1 million Result is a more user-friendly program that provides 7(a) alternative for larger LOCs 4 CAPLines vs. SBA Express for Credit Requests $350,000 What are the benefits of using the CAPLines program for small LOCs? 5 General CAPLines Program Parameters Maximum Line Amount: $5,000,000 [same as regular 7(a)] Maximum Guaranty Percentages: 85% for loans of $150,000 or less; 75% for loans over $150,000 [same as regular 7(a)] SBA Guaranty Fees: same as regular 7(a) [including FY 2014 fee waiver] Interest Rates: same as regular 7(a) Collateral: Varies by sub-program personal guaranty requirements same as regular 7(a) 6 2
Allowed Uses of Proceeds Varies by CAPLines sub-program - Note: Only Working Capital CAPLines permits refinancing, i other CAPLines subprograms do not allow 5(G), pages 120-121 7 Are New Starts Eligible for CAPLines? SBA has confirmed that new start businesses are NOT eligible for CAPLines, BUT Based on specific sub-program, CAPLines may be appropriate when loan applicant has demonstrated that it has begun generating revenues or demonstrated competent performance in area where financing is being sought 8 Maturity vs Monitoring Maturity Date = date in which the loan will have a hard maturity - Must be stated t in the Promissory Note Monitoring = lender s establishment of internal controls to establish good credit behaviors within the credit 9 3
Maximum Maturity 10 years, except Builder s CAPLines which by regulation cannot exceed 5 years BUT, if loan finances a single transaction, term should match seasonal cycle (Seasonal CAPLines), contract completion date (Contract CAPLines), or project completion date (Builder s CAPLines) All CAPLines must have exit strategy In all cases final disbursement should occur far enough in advance of maturity to provide time for assets acquired by loan to be converted back into cash and final payment 5(G), pages 128, 130 10 Extension of Maturity Any CAPLine with maturity less than maximum allowed may be extended ( renewed ) as long as total revolving repayment period does not exceed program maximum - Important reminder: renewal fees prohibited by SBA even if you charge on your similar conventional LOCs! After maximum term, in order to aid in the orderly repayment, maturity CAPLines maturity can be extended once for an additional 10 years - Measured from original maturity before any renewals - NO advances during extension period this is a term-out option, NOT a continued use of the revolving component 11 Credit Analysis Requirements Although NOT clear in SOP, requirements for CAPLines different from regular 7(a) ALL CAPLines subject to same credit analysis requirements as regular loans > $350,000 - Small CAPLines will be credit scored, BUT - NOT eligible for abbreviated credit analysis based on receiving credit score acceptable to SBA 5(G), pages 154-160 12 4
CAPLines Collateral Requirements SOP 50 10 5(G) does not specifically exclude CAPLines from SBA s general collateral requirements (pages 161-163) BUT SBA has advised that CAPLines loans must follow CAPLines specific collateral requirements - As specified for each CAPLines sub-program (pages 168-169) - Collateral required for CAPLines even if $25,000 or less AND, SBA s general personal guaranty requirements apply 13 CAPLines Authorization National CAPLines Authorization Boilerplate Version 2012 issued June 15, 2012 - www.sba.gov/content/caplines-boilerplate - Used for all CAPLines loans regardless of size (over or under $350,000) Format similar to regular Authorization customized to CAPLines program Considered to be an Appendix to SOP 50 10 5 If contradictory to SOP, SOP prevails Clean-up period may be included at lender s option but Only Seasonal CAPLines requires a zero balance be maintained for any specific time period 5(G), page 179 14 CAPLines Loan Increases Okay any time during the life of the loan, but must be within 10 years of loan approval (except Builder s CAPLines within 5 years of approval) SBA must approve increase [same as all 7(a)] 15 5
Working Capital CAPLines 16 W/C CAPLines Eligibility Applicant must Generate accounts receivable (not notes receivable), and/or have inventory 5(G), pages 106-107 17 Allowed Uses of Proceeds Working Capital CAPLines = solely for short term working capital/operating needs, including refinancing some existing short term debt not: - To pay delinquent withholding taxes or similar trust funds (state sales taxes, etc.), or for floor-planning OR - To acquire fixed assets If proceeds inappropriately used to acquire a fixed asset, 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 18 6
Refinancing Existing LOCs [ONLY Working Capital CAPLines permits debt refinancing] Refinancing of short term revolving debt allowed when - Meets regular refinancing criteria regarding: Eligibility (subparagraph 3) 10% cash flow improvement (subparagraph 4) File documentation requirements met (subparagraph 5) - Short term revolving debt is terminated after it is paid off with the CAPLines loan - Refinancing does not put SBA in a position to sustain a loss which current lender is facing... 5(G), pages 112-113 19 Refinancing Same Institution Debt If refinancing includes same institution short term debt - Must be submitted to the LGPC for processing AND - If loan defaults within 90 days of initial disbursement, presumption that proceeds were used to pay a creditor in a position to sustain a loss and SBA may deny liability on its guaranty If application includes refinancing of same-institution, SBA-guaranteed short term revolving debt, in addition to all other requirements, lender s exposure to the applicant must not be reduced 20 Not Eligible for Refinancing If short term revolving debt to be refinanced was not revolving in accordance with the terms of the note, debt is not eligible to be refinanced under CAPLines 5(G), page 113 21 7
Extraordinary Servicing Fees To compensate for costs associated with extraordinary servicing i.e., monitoring accounts receivable and inventory collateral - NOT subject to 2% limitation, but must be Prudent and reasonable and Consistent with what lender charges for conventional loans of similar size - SBA approval required Delegated: Disclose fee in credit memo & enter fee in E-Tran Non-Delegated: Disclose fee in credit memo 5(G), pages 142, 145 22 Determining Maximum Line Amount If Borrowing Base Certificate Lender must either - Follow its established policies and procedures for similar unguaranteed commercial LOCs OR - Use SBA s formula Net sales for prior year Divided by 365 Times number of days to finance (business credit cycle) Result = estimated W/C needs Prior Year s Net Sales X # days to 365 finance 5(G), page 124 23 Disbursing Working Capital CAPLines Lenders have option of disbursing the line proceeds based on - Borrowing base certificate (BBC) or - 1:1 collateral based on Working Capital CAPLinesspecific collateral valuation standards Different criteria apply... 5(G), pages 214-220 24 8
Disbursing W/C CAPLines If BBC: Must use following margins: - A/R = 80% of eligible accounts 90% if A/R is prime Federal contract and other conditions are met - Inventory = 50% of eligible inventory [After 1 st disbursement lender has unilateral authority to increase/decrease advance rate up to 5% above or below rate in Authorization] Without BBC: Must assume full utilization of LOC AND take collateral to give 1:1 collateral ratio (using CAPLine-specific valuations) Must obtain 1st lien on working/trading assets (A/R and inventory) financed with line If the working/trading assets insufficient must take additional business/personal assets to get to 1:1 ratio 25 Collateral If Using Borrowing Base Certificate If lender will disburse line based on a borrowing base certificate - Must obtain a first lien on the applicant s working/trading assets (i.e., A/R and inventory) 5(G), page 169 26 Eligible Receivables SBA has specific requirements related to which receivables are eligible, including Where issues of concentration may need to be considered 5(G), pages 216-217 27 9
Calculating the Borrower s Cash Cycle Loan Authorization requires lender to insert borrower s cash flow cycle - Allows for understanding of the borrower s final disbursement and when this must occur - Authorization will require the insertion of this date for accuracy to either the site visit or the unwinding of the final collection of eligible A/R as collected *Consider Borrower s Cash Flow cycle calculation inside your credit memo; allows for consistency to the Authorization insertion 28 For Both Borrowing Base Certificates and 1:1 Collateral Loans Level of control dictated by borrower/lender relationship - If deposit relationship, cash collateral account not required Lender follow disbursement process for conventional loans - If no deposit accounts, controlled account is required Payments remitted to lender via joint payee checks to lender and borrower or Lock Box account No requirement that zero balance be maintained for any specific time period - Lender s discretion whether to include requirement for clean up period in Authorization 5(G), pages 187, 215, 216-217, 219-220 29 Monitoring Monitoring of lines should be consistent with lender s policies and procedures for similarly sized, non-sba commercial lines of credit AND, at a minimum Lender must follow SBA CAPLines-specific monthly, quarterly and annual monitoring requirements 5(G), pages 214-218 30 10
Contractor CAPLines 31 Contractor CAPLines Eligibility Applicant must Be able to demonstrate an ability to operate profitably based upon the prior completion of similar contracts; Possess the overall ability to bid, accurately project costs, and perform the specific type of work required by the contract(s); and Have the financial capacity and technical expertise to complete the contract on time and at a profit Have contract(s) that permit lender to obtain an assignment of proceeds (with some exceptions) 32 Allowed Uses of Proceeds Solely to finance costs of one or more specific contracts, including overhead or general and administrative expenses not: - For permanent working capital - To acquire fixed assets - To pay delinquent taxes or similar funds held in trust - To refinance existing debt - To finance a contract already significantly under way - For change of ownership or floorplan financing - To fund mark-up or profit OR - To finance contract other than one specified 33 11
Establishing Loan Amount Single Contract CAPLine may fund single or multiple contracts After overall line amount approved by SBA, lender may advance against additional contracts without SBA approval so long as in compliance with Authorization For single contract t financing i - Loan amount = sum of costs of contract (excluding profit) per project cost schedule For multiple contract financing - Master note amount = sum of costs of all contracts (excluding profit) to be financed per project cost schedules - Amount for future projects should be identified when contract obtained 5(G), page 123 34 Contracts with Performance Bonds Contractors with performance bonds can be financed using the Contract CAPLine product UCC security interest in the contract proceeds is required SBA acknowledges UCC filing will be subordinate to cost reimbursement of the bonding company 35 Collateral Mandatory 1st lien position on contract(s) and proceeds of contract(s) financed by line Generally requires assignment to lender and UCC filing (exception possible) - MUST be in place and acknowledged by paying entity before any disbursement Lender may take additional collateral in accordance with its practices for similar unguaranteed loans Standard personal guaranty requirements apply 5(G), page 169 36 12
Disbursement Funds disbursed when needed to pay for costs on specific contract Not lump sum to cover all costs Except lump sum disbursement allowed: - When contract performance period is < 30 days OR - Contractor wants to purchase materials up front to take advantage of volume discounts 37 Payments Payments on contract should be made directly to lender Lender applies payments first to interest then to principal p 38 Two Additional CAPLines... - Seasonal - Builder s 39 13
Eligibility Seasonal CAPLines applicant must - Have been in operation for at least 12 calendar months, and - Be able to demonstrate a definite pattern of seasonal activity 5(G), pages 106-107 40 Allowed Uses of Proceeds Seasonal CAPLines = solely to finance seasonal increases of A/Rs and inventory or in some cases associated labor costs not: - To maintain activity during slow periods of business cycle 41 Eligibility Builder s CAPLines applicant must - Be a construction contractor or homebuilder under NAICS codes 236220, 236115, 236116, or 236118 with a demonstrated managerial and technical ability in profitable construction or renovation - Be able to either perform the construction/renovation ti ti work or manage the job with at least one supervisory employee on the job site during the entire construction phase - Have demonstrated a successful performance record in bidding and completing construction/renovation at a profit within the estimated construction period on a project of comparable type and size to that proposed - Be able to demonstrate prior prompt payments to suppliers 42 14
Allowed Uses of Proceeds Builder s CAPLines = solely for direct expenses related to the construction or substantial renovation costs of a specific eligible project (residential or commercial buildings for resale) - May include land (up to 20% of project cost), labor, supplies, materials, equipment rental, direct fees (building permits, interim disbursement inspection fees, etc.), utility connections, construction of septic tanks, landscaping, subcontractors (including subcontractor profit), improvements such as streets, curbs, etc. benefitting entire community (up to 5% of total project cost) - Not for purchase of vacant land for future construction or to operate or hold rental property for future rehabilitation 43 Finally... 44 Tips for CAPLines Success Assure a successful exit strategy by establishing appropriate internal monitoring controls Make sure that internal controls coincide with cashflow cycle days this gives you the opportunity to revisit the credit and assure borrower is controlling its credit appropriately 45 15
Questions? 46 47 16