welcome Why is SBA So Concerned About Debt Refinancing? Primary reason: credit elsewhere mandate in SBA s legislation No financial assistance shall be extended pursuant to this subsection if the applicant can obtain credit elsewhere [Small Business Act, Sec. 7(a)(1)(A)] So, SBA can guarantee a loan ONLY if the borrower can t get the funding from another source Dilemma: if the borrower already has a loan, doesn t that mean that credit was available elsewhere? It sounds as if it would mean that, but... 2 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 1
How Does SBA Justify Guaranteeing Loans That Refinance Existing Debt? g Refinancing is limited to debts that are not currently on reasonable terms 3 What Debts Does SBA Consider NOT to be on Reasonable Terms? Loans that involve a demand note or balloon payment Debt with a high interest rate Credit card debt used for business purposes Loans that are over-collateralized Revolving LOCs when original lender unwilling to renew or applicant is restructuring Loans with inappropriate maturity, e.g., a 3-year term loan that financed equipment with a 15 year useful life... 5(H), page 114 4 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 2
What Debts Does SBA Consider NOT to be on Reasonable Terms? (cont) Debt used to finance a change of ownership If due to financial institution, must be 6 months old for delegated processing If seller take-back, may not be refinanced for 24 months, and must have been current for past 24 months Debt not listed that lender believes no longer meets needs of applicant But, when this is the justification, loan must be processed through LPGC 5 Can I Refinance Any Loan? No, there are several basic eligibility requirements Loan must be treated as a debt of the business Loan proceeds must have been used by the business for a business purpose AND... 5(H), page 112 6 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 3
Can I Refinance Any Loan? (cont) The loan must have been eligible for 7(a) financing when it was made OR must now be eligible SBA guaranteed loan proceeds may not be used to refinance debt originally used to finance a loan purpose that would have been ineligible for SBA financing at the time it was originally made unless the condition that would have made the loan ineligible no longer exists 5(H), page 112 7 What Does SBA Mean When It Says the Debt Must be a Debt of the Business? Debt reflected on the applicant s business balance sheet may be eligible if it has been reported on the applicant s business tax returns showing the interest expense associated with the debt In other words... the business must regard the loan and dtreat tit as a debt of the business 8 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 4
How Do I Prove That the Debt was a Debt of the Business? If debt to be refinanced was first extension of credit You must obtain documentation to show that the proceeds were used exclusively for the applicant business and not used for any ineligible purpose BUT what if the debt being refinanced was previously refinanced?... 9 Can I Refinance a Debt That was Previously Refinanced? Yes, and the restrictions ti have been softened, but Debt must be shown on business tax returns AND Borrower must certify that the debt was used exclusively for the applicant business and not used for any ineligible purpose 10 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 5
Can I Ever Refinance Debt in a Personal Name? If debt in a personal name (including HELOC) applicant must Certify that the amount being refinanced was used exclusively for business purposes and Provide appropriate documentation (e.g., copy of note and/or current loan statement) to demonstrate debt was used for business purposes 11 Are There Any Special Requirements for Refinancing Credit Card Debt? ONLY business charges on credit cards may be refinanced applicant certification required Easiest if credit card is in the business name You must verify that card in business name and applicant must certify card used only for business purposes If credit card in personal name Applicant must certify business use AND You must obtain supporting documentation (credit card statements and receipts describing the charge) for all charges over $250 5(H), pages 112-113 12 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 6
What Do I Need to Address in My Credit Memo? SBA provides a list of questions that must be answered Why was debt incurred? Has over-obligated or imprudent borrower necessitated a major restructuring of the debt? Is debt currently on reasonable terms? How will new loan improve applicant s financial condition? If credit card debt, what business purpose?... 5(H), pages 113-114 13 Credit Memo Must Address (cont) Does refinancing include payments to creditors in a position to sustain a loss either because of inadequate collateral position or low or deficit net worth? Would the lender/sba be likely to sustain part or all of the same loss by refinancing the debt or will additional collateral or altered terms protect? What portion of the total loan is refinancing? Also, for some refinancings, lender must address whether sufficient cash flow improvement... 14 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 7
Cash Flow Improvement Test With some exceptions new installment amount must be tl t10% l th th i ti i t ll t t( ) at least 10% less than the existing installment amount(s) Improvement is in the aggregate NOT required of each debt Excluded from cash flow improvement requirement Long-term debt structured with a demand note or balloon payment NO cash flow improvement required Credit card debt NO cash flow improvement required Revolving lines of credit (short- or long-term) NO cash flow improvement required 5(H), page 113 15 Can I Refinance My Institution s Debt? Generally allowed when all other refinancing criteria are met Lender MUST provide a transcript of the loan showing due dates and when payments received AND MUST explain any late payments and late charges occurring during last 36 months Late = payment not made within 29 days of due date CANNOT refinance when there is an appearance that the lender will shift to SBA all or part of a potential loss from that same debt CANNOT process via PLP unless loan is a bridge loan 5(H), page 114 16 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 8
Bridge/Interim Loans PLP processing okay if: Debt is interim loan made for other than real estate construction purposes and loan approved by lender within 90 days before issuance of PLP loan number OR Debt is a construction loan that has not been disbursed If non-plp processing, lender may make interim advances only AFTER loan authorization is issued and only if disbursements reasonably compliant with loan authorization IF SBA has NOT yet approved loan considered d same institution refinancing, NOT bridge loan Bridge/interim loans are made at lender s risk! 5(H), pages 114, 117 17 May I Refinance an SBA-Guaranteed Loan? Yes, but refinancing must meet general requirements AND Either you or borrower must provide evidence from current lender that it has declined to approve an increase or a second loan and is unwilling or unable to modify current payment schedule If SAME INSTITUTION SBA debt: Only eligible e if loan sold on secondary market and investor will not agree to necessary modification Cannot be processed PLP... 5(H), pages 114-115 18 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 9
Refinancing an SBA-Guaranteed Loan (cont) WARNING PITFALL: VERY difficult to find that an existing SBA loan is not on reasonable terms 19 Can I Refinance a 504 Loan? It depends... refinancing is permitted if all refinancing conditions are met AND Both the 504 loan and the 3rd party (1st mortgage) loan are being refinanced OR The 3rd party loan has been paid in full and refinancing of the 504 loan is needed as part of a larger transaction to expand or renovate the project property Standard 504 prepayment penalties apply AND Lender must explain justification of refinancing i in file Note: problem is that debt being refinanced can t be on reasonable terms difficult to prove in case of 504 Non-delegated processing required 5(H), page 115 20 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 10
Are There Any Other Refinancing Requirements? YES... Generally at a minimum, i collateral l on new loan must be the same as loan being refinanced SBA may permit substitution of collateral of equal value Loan authorization must include: Itemization of all debts of $10,000 or more being repaid Any existing SBA debt must be identified by loan # and dollar amount Transcripts required If same institution for past 36 months including explanations of any late payments 21 With the caveat that t every loan is different and that you must always look at the individual circumstances of each application Let s examine a few scenarios... 22 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 11
Scenario 1 Applicant wants to refinance existing seller take-back note made last year for the purpose of purchasing the business Note fully amortizing with P&I payments timely made since inception Eligible? 23 Scenario 1 Analysis Eligible?... NO SBA refinancing not eligible because SOP specifically prohibits refinancing seller take-back debt during first 24 months (page 113) Fact that P&I payments have been made not relevant 24 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 12
Scenario 2 Applicant wants to refinance a seller take-back note made more than two years ago Note on partial standby requiring interest only payments which were timely made since loan inception Eligible? 25 Scenario 2 Analysis Eligible?... YES (assuming all other eligibility criteria are met) SBA refinancing eligible because The loan has been in place for at least 24 months AND has been current for the last 24 months When timely payments in the amount agreed upon in the note, have been made, even interest only payments, the loan is considered to be current, BUT IF the loan had been on full standby (NO payments of principal or interest), SBA would NOT consider it to have been current since no payments would have been made 26 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 13
Scenario 3 Applicant wants to refinance existing term loan made five years ago to purchase commercial real estate as an investment Two years ago, the business moved its operations into the building Eligible? 27 Scenario 3 Analysis Eligible?... YES (assuming all other refinancing criteria are met) SBA refinancing eligible because The condition that would have made the loan ineligible when it originally made has been corrected 28 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 14
Scenario 4 Applicant wants to refinance atermloan made five years ago to purchase commercial real estate that was purchases as an investment Part of the loan proceeds went to renovate the building and the business is now using 51% of the rentable property and only leasing out 49% Eligible? 29 Scenario 4 Analysis Eligible?... NO SBA refinancing not eligible because The purpose of the loan included an ineligible purpose (renovations of leased space) that cannot be corrected 30 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 15
Scenario 5 Applicant wants to refinance existing term loan made five years ago to purchase commercial real estate as an investment Business is continuing to lease out 100% of the building, but has plans to move into it soon Eligible? ibl 31 Scenario 5 Analysis Eligible?... NO SBA refinancing not eligible because Original purpose of loan remains ineligible 32 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 16
Scenario 6 Applicant (Hotel 1) owned by Tom and Sue Smith (spouses) wants to refinance a loan that was used for two purposes To refinance the loan that purchased the building owned by Hotel 1, and To provide cash out of that transaction that was used to purchase Hotel 2 owned by Tom and Tim Smith (brothers) Eligible? 33 Scenario 6 Analysis Eligible?... NO SBA refinancing not eligible because Loan not eligible for 7(a) when originally made loan proceeds must have been used by applicant business Here, part of loan proceeds went to buy a different business with a different ownership structure REMINDER: when refinancing a previously refinanced debt SBA requires applicant to certify that debt was used exclusively for the applicant business... 34 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 17
Scenario 7 Applicant wants to refinance existing SBA term loan made by another lender that provided working capital Loan is fully amortized over 4 years borrower has been paying as agreed Fixed rate of 5.6% Secured with a blanket lien on business assets Overall 10% cash flow improvement Eligible? 35 Scenario 7 Analysis Eligible?... Based on recent loan decisions in the LGPC, probably NOT SBA refinancing probably not eligible because VERY difficult to find that an existing SBA loan is not on reasonable terms Even though SBA permits a loan for W/C to have a term as long as 10 years, it requires that the term be set based on the applicant s repayment ability In this example, since the borrower had been making its payments on time, we would have to assume that the term was appropriate 36 Copyright 2015, NAGGL, Inc. - Do Not Copy/Distribute 18