SBA Lending MCUL Lending Conference What does a guaranty mean to you?
What will be covered Benefits of SBA SBA Loan Programs 7(a) Lending Parameters Determining Eligibility Credit Considerations Use of Proceeds Applying to the SBA Other 7(a) Programs Lender Resources
Benefits of SBA
SBA Benefits the Lender SBA provides a guaranty against loss to the lender. This means: Lower risk Increased profits Improved liquidity, and A bigger portfolio!
SBA Benefits the Client Lower down payment Offer longer terms/amortization Eliminate balloon payments Cover collateral shortfall
Typical Uses of the SBA Guarantee Insufficient collateral available Start ups (less than two years) Industry risk Poor historical earnings Insufficient equity
SBA Loan Programs
SBA Loan Programs SBA 7(a) SBA Express SBA Veterans Advantage Export Express CAP Lines Community Advantage SBA 504 Microloans
7(a) Lending Parameters
Loan Size and Guaranties Maximum loan: $5,000,000 (aggregate) Maximum guaranteed amount: $3,750,000 $150,000 or less 85% guaranty Over $150,000 75% guaranty
General Maturity Requirements Based on useful life of assets Working capital: up to 10 years M&E / F&F: generally 10 years, maximum of 25; not to exceed life of asset Land/building: up to 25 years, plus time to complete construction/renovation Refinancing: based on use of proceeds of the underlying loan being refinanced; consider remaining useful life of assets
Maturity on Mixed Loan Uses Blended term (weighted average) Example: Term = 18 years Purpose Amount % Maturity Weight Real Estate $ 300,000 60% 25 15 Machinery & Equipment $ 100,000 20% 10 2 Working Capital $ 100,000 20% 7 1.4 $ 500,000 100% 18.4 Term based on principal use of proceeds Use the maximum term of asset class that is largest percentage of use of proceeds. Example (above): term = 25 years Consider ability to repay
Maximum Interest Rates Base rate + spread below Loan Amount Term < 7 yrs Term 7 yrs Up to $25,000 4.25% 4.75% 25,001-50,000 3.25% 3.75% 50,001 & above 2.25% 2.75% Base rate: WSJ Prime, One month LIBOR + 3%, SBA Peg Rate, SBA Fixed Rate All rates posted at: www.colsonservices.com
Guaranty Fees Fee charged on guaranteed portion of the loan May be passed on to borrower Gross Loan Amount SBA Guaranty Fee Rate < $150,000 85% 2.0% $150,001-700,000 75% 3.0% > $700,000 75% 3.5% Additional 0.25% for guaranty amount over $1,000,000 For short-term (under 12 mos.) notes, fee is 0.25%
Other Fees Ongoing fee Cannot be passed on to borrower 0.52% annual fee on outstanding balance of guaranteed portion of 7(a) loans Paid monthly, electronically, through Colson Fee percentage may be changed annually Lender may charge an additional, reasonable, "Packaging Fee
Fees Effective October 1, 2013 7(a) Loans Over $150,000 Yearly (On-Going) Fee Reduced to.52% Upfront Guaranty Fee no change 7(a) Loans $150,000 or less No Upfront Guaranty Fee, No On-Going Fee If additional loans approved above $150,000 within 90 days, full fees apply to those loans, Example: $150,000 loan(s) approved on December 12, 2013 No fees apply Second loan approved January 12, 2014 Full fees apply to second loan
Prepayment Penalties Referred to in SOP as Subsidy Recoupment Fees Only applies to loans with 15 years or greater maturities Use declining balance method: 5% of prepaid amount in first year, 3% in second, 1% in third No other Prepayment Penalty allowed
Eligibility
Eligible Businesses Able to demonstrate a need for credit Small under SBA size standards An operating (not passive) business, engaged in an eligible industry Organized for profit Located in the United States
Ineligible Businesses Non-profits (for profit subsidiaries may be eligible) Financial businesses Life insurance companies Pyramid sale distribution plans Government-owned entities Cooperatives Loan packagers (earning more than 1/3 of their income from SBA packages) Speculative businesses
More Ineligible Businesses Gambling activities Promoting religion Providing sexual material Prior loss to the government Passive owners of property Principal(s) on probation or parole (all principals or key employees ever arrested, charged or convicted must be cleared through the District Office Form 912)
Credit Elsewhere Test Applicant is unable to obtain the loan on reasonable terms without SBA guaranty, AND Resources of the business or principals does not provide adequate financing
Credit Elsewhere Test The applicant must demonstrate a need for a guaranty on the loan Need longer maturity than lender policy permits Loan exceeds lender s legal lending limit/policy Lender liquidity depends on secondary market Inadequate collateral under lender policy Violates lender policy regarding loans to new businesses or in applicant s industry Other factors related to credit that require guarantee Unacceptable factors: To address CRA compliance To refinance debt already on reasonable terms
Personal Resources Test Excess personal liquid resources must be used to reduce the loan request Applies to all 20%+ owners Spouses If both spouses have ownership, only one exemption Spouse must sign personal financial statement Consider liquid assets of principal + spouse + dependent children Lender must document calculations/findings in file
Personal Resources Exemption Total Financing Package Exemption (SBA + equity injection + other financing) greater of: $250,000 or less 2.0x or $100,000 $250,001 - $500,000 1.5x or $500,000 Over $500,000 1.0x or $750,000
Personal Eligibility Each owner of 20% or more of the applicant business must be: Of good character Legally in the United States Able to demonstrate need for credit, with No prior loss to the government To determine character Credit reports Form 912, Personal History Statement Form 4506-T, IRS Verification of Financial Information
Size & Affiliations Alternative size standard Tangible Net Worth less than $15 million, AND Net Income less than $5.0 million (two-year average, excluding any carry-over losses), OR Traditional size standard, by NAICS code Retail and Service $7 to $35.5 Million Manufacturing 500 to 1,500 Employees Wholesale 100 Employees Construction $7 to $33.5 Million For additional information: www.sba.gov/size
Franchise/License/Dealer/Jobber Agreements Main concern possibility of affiliation via Common ownership Common management Excessive restrictions on sale/transfer of franchise interest Excessive control over profits and loss If processed through LGPC, SBA reviews and determines eligibility. Delegated lenders may determine their own eligibility OR submit to SBA www.franchiseregistry.com/ www.sba.gov/content/franchise-findings
Eligible Passive Company An Eligible Passive Company (EPC) holds the fixed assets of an Operating Company (OC) Both the EPC and OC must be co-borrowers on loan
Credit Considerations
Credit Analysis Lender must analyze each application in a commercially reasonable and prudent manner Basically, consider the 5 C s of Credit Cash flow is primary source of repayment (not liquidation of collateral)
Lender s Analysis Must Include History and nature of business Business plan Owners and managers relevant experience Financial condition of the business before and after the loan Repayment ability Collateral adequacy Equity adequacy Other relevant information
Equity Requirements Adequate equity is expected by the SBA Generally, a minimum of 10% of total project cost is the expected injection Lenders must document injections prior to disbursing loan proceeds
Collateral Requirements Up to $25,000 Collateral not required $25,001-$350,000 Follow own collateral policy Minimum - Lien on fixed assets Above $350,000 Fully Secured, to the extent available The SBA will not decline a loan on the basis of insufficient collateral, as long as all available and worthwhile collateral has been secured Includes business and personal assets A/R and inventory can be taken as collateral, but have no value in collateral calculations
Collateral Requirements How to determine if a loan is fully secured Valuation methods: Adjusted net book value (ANBV): Original purchase price minus depreciation and amortization Orderly liquidation appraised value (OLV) Discounted accordingly: New M&E: 75% of ANBV or 80% of OLV Used M&E: 50% of ANBV or 80% of OLV Real Estate: 85% (Based on appraisal value following SBA requirements - SOP)
Preferences With multiple loans for the same purpose with the same collateral, the lender cannot have a superior lien position to SBA Pari Passu
Guaranties All owners of 20% or more are required to pledge a full, unlimited personal guaranty If the combined ownership of spouses totals 20%, both must fully guaranty Full or limited guaranties of other parties may be required for credit reasons
Life Insurance For 7(a) loans under $350,000, lenders may use own policy for similar loans For standard 7(a) loans over $350,000 lenders may use own policy for similar loans except when business is dependent on a sole owner Required to cover collateral shortfalls The amount and type of collateral can be factored into the determination of the insurance amount
Use of Proceeds
Eligible Uses of Proceeds New starts Business acquisitions Expansions Working capital Land, buildings, equipment Inventory, materials Debt refinancing
Ineligible Uses of Proceeds Pay delinquent taxes or other funds held in trust Pay or refinance debt used for distributions to associates of the applicant
Real Estate Occupancy Requirements Purchase of existing building: applicant must occupy 51% of rentable property, and may permanently lease out 49% New construction: 60% must be occupied by applicant permanently 20% may be leased out permanently 20% may be leased out temporarily Applicant must occupy some within 3 years Applicant must occupy all within 10 years Loan to EPC: EPC must lease 100% to OC, and OC must comply with occupancy rules
Refinancing Eligibility Demand note or balloon payment Debt with an interest rate that exceeds the SBA maximums Credit card obligations used for business-related purposes Debt that is overcollateralized Revolving lines of credit where original lender is unwilling to renew Restructuring revolving lines to obtain a lower interest rate or longer term Aggressive maturities
Policies on Refinancing Original loan must have been SBA-eligible Most installment loans require a 10% payment reduction Same institution debt: Include a 36 month transcript, with explanation of late payments SBA debt at another institution: verify and document current lender is unwilling to match proposed terms
Change of Ownership Purchase must result in 100% ownership Must be in the best interest of the business (not buyer or seller) Arms-length transaction; requirements: Buy-Sell Agreement Business valuation Qualified third party valuation required if intangible assets exceed $250,000 Must be submitted at time of application Current financial statements for existing business
Change of Ownership, cont. Lender cannot use delegated authority for intangible financing in excess of $500,000 unless: The buyer and/or seller finance at least 25% AND Seller financing is on full stand-by for principal and interest for at least two years (can be considered equity injection)
Applying to the SBA I have my internal bank approval NOW WHAT??
SUBMISSION OF APPLICATION FOR GUARANTY All applications for SBA loans must be submitted through E-Tran or electronically to the LGPC starting January 1, 2014
SUBMISSION OF APPLICATION FOR GUARANTY The different application methods are: 1. Standard 7(a) Guaranty (includes Certified Lender Program) Loans up to and including $350,000 (SLA) E-Tran and SendThisFile or slaloans@sba.gov Loans over $350,000 to $5,000,000 E-Tran and SendThisFile 2. Preferred Lender Program (delegated) E-Tran Loans up to and including $350,000 (SLA) Loans over $350,000 to $5,000,000
SUBMISSION OF APPLICATION FOR GUARANTY 3. SBA Express (delegated) E-Tran 4. Export Express (delegated) E-Tran 5. Community Advantage E-Tran and SendThisFile
CONTENTS OF LENDER S APPLICATION Non Express Loans $350,000 or Less Follow existing SLA application process and documentation All loans must be SBA credit scored through E-Tran prior to submission/approval DUNS number is recommended (find or apply for it at http://mycredit.dnb.com/search-for-duns-number/) Non Express Loans $350,000 or More Follow existing SLA application process except credit scoring Additional documentation required as in SOP 50-10-5(F) including business financial statements and/or tax returns must be dated within 180 days prior to submission to SBA
CONTENTS OF LENDER S APPLICATION All SBA Guaranty Loan applications will utilize: SBA form 1919 (Borrower s form) SBA form 1920SX (Lenders form) Both forms currently under revision SBA form 912 also needed for each loan until SBA form 1919 revised After revision, only needed if the arrest/conviction information requires SBA clearance
CONTENTS OF APPLICATION SBA Form 1919 Form includes the certifications and requirements previously set forth in SBA Forms 601, 912, 1261, and 1624. Also follow all requirements imposed by laws and executive orders Form 601 required if construction costs will exceed $10,000. Form 159 required if applicant paid a fee for the application processing or referral to lender.
Contents of Application SBA Form 1920SX, Lender s Application Exhibits: Sources and Uses of Funds Bank s Credit Memo Justification of New Businesses and Change of Ownership Narrative SBA Form 1846 (lobbying)
Content of Application Personal Financial Statement Business Financial Statements: Balance Sheet & P&L for last three years Reconciliation of Net Worth Interim Balance Sheet and P&L (within 180 days) Subsidiary and affiliate info Cash flow projection History of business Resume of principals
Content of Application Miscellaneous: Copy of lease Detailed list of machinery and equipment Real Estate purchase info (appraisal, environmental, purchase agreement) Business Valuation, as required Franchise Information
Content of Application Other Forms: IRS Form 4506-T (Date of Submission) http://www.irs.gov/individuals/article/0,,id=1616 49,00.html USCIS Form G-845 Include USCIS Response (new process through SBA)
Loan Authorization Defines Terms and Conditions of the loan guaranty Acts as checklist for closing Lender can prepare, or Loan Center will Lenders can use Wizard and boilerplate language, available at www.sba.gov/for-lenders
Processing Timeline Submit application Receive control number from LGPC If you receive a screen out, provide additional info/clarification Upon approval, receive Authorization
Other 7(a) Programs
CAPLines Revolving debt Working Capital, Contract, Seasonal and Builder s Working capital CAPLine Up to 10 year maturity Lender chooses whether to use borrowing base or not Lender uses own note and guaranty agreements Follows standard 7(a) pricing, maximums, guaranties, etc.
SBAExpress Delegated authority, separate approval required $350,000 maximum (cumulative for all Express loans), 50% guaranty Interest Rate Maximums Loans $50,000 or less: Base + 6.5% Loans > $50,000: Base + 4.5% Lenders use own forms & procedures SBA Veterans Advantage Up-front guaranty fee waived for veteran owned businesses (including spouses)
SBA Trade Finance Programs Export Working Capital Loans Export Express International Trade Loan SBA Trade Credit Officer aids in transaction assessment and tailored deal-structuring
Need Help?
SBA Lender Resources SBA s SOPs, regulations and notices at www.sba.gov/for-lenders Standard 7(a) Loan Guaranty Processing Center: 916-735-1515 x 4638 Email 7aquestions@sba.gov
Michigan District Office Detroit: Ph (313) 226-6075, Fax (313) 226-4769 Al Cook, Ext. 221, allen.cook@sba.gov Romy Ancog, Ext. 259, romualdo.ancog@sba.gov Tom McFadden, Ext. 228, thomas.mcfadden@sba.gov Grand Rapids: Ph (616) 456-5512, Fax (616) 456-5514 Brian Picarazzi, brian.picarazzi@sba.gov
Questions?