SBA 7a Training

Over 80% of Rhode Island Loans fall below $150,000!

504 lending is up 35%!

Dollars are up 18%!

Smart.Bold.Accessible

Hello MA & RI Lenders !

https://www.youtube.com/watch?v=TPNnRVgLSBs

SBA en español

• Goes live on April 7 ,2015

• Spanish version of SBA.gov

• Can be previewed at https://es.sba.gov/

All SBA 7(a) Loans of $150,000 or less have:

– NO Guaranty fee – NO on-going servicing fee for the lender– 51.9 basis points for loans above $150,000 YTD savings $500,000 in MA YTD savings $100,000 in RI

ALL SBA Express loans to VETERANS– No guaranty fee up to $350,000

Extended thru 9/30/15

SBA Veteran Advantage

All SBA loans to eligible veterans:– reduces the up-front guaranty fee from 3%

to 0% for SBA Express loans over $150,000– Note that there is no reduction in the

Lender’s annual service fee for loans over $150,000

– All other 7(a) loans: guaranty fee is reduced 50%

Businesses must be 51% or more owned and controlled by an individual or individuals in one of the following groups: • Veterans (other than dishonorably discharged) • Service-Disabled Veterans • Active Duty Military service member participating in the

military’s Transition Assistance Program (TAP)• Reservists and National Guard Members • Current spouse of any Veteran, Active Duty service

member, or any Reservist or National Guard member; or widowed spouse of a service member who died while in service or of a service-connected disability.

To Qualify

SOP 50 10 5(G)

Effective Date

10/01/2014

• A MUST READ

• 364 pages of information gold

• Find your answer FAST w/ Ctrl Button + F

Personal Resource Test

Credit Elsewhere Test RemainsThe purpose of the Credit Elsewhere test is to determine if the Small Business Applicant has the ability to obtain some or all of the requestedloan funds on reasonable terms from non-Federal Federal sources without SBA assistance.

SOP (G), Page 84

• IRS Tax Transcripts must be reviewed PRIOR to submission to Citrus Heights on all non-delegated lenders– prior to disbursement on delegated loans

• All 7a loans will use Forms 1919 & 1920 – No more Form 4 or Form 4-I

• Lenders may use their own Note & Guaranty– Must be legally enforceable & assignable, have stated maturity & not be

payable on demand– Must include “SBA Language” re: interpretation & enforceability– If selling on the Secondary Market using Forms 147 & 148 is recommended

What language ?

Your own note:When SBA is the holder, this Note will be

interpreted and enforced under federal law, including SBA regulations. Lender or

SBA may use state or local procedures for filing papers, recording documents,

giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive

any federal immunity from state or local control, penalty, tax, or liability. As to this Note,

Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat

any claim of SBA, or preempt federal law.”

Your own guaranty:“When SBA is the holder, the Note and this Guarantee will be interpreted

and enforced under federal law, including SBA regulations. Lender or SBA may use

state or local procedures for filing papers, recording documents, giving notice,

foreclosing liens, and other purposes. By using such procedures, SBA does not

waive any federal immunity from state or local control, penalty, tax, or liability. As

SOP 50 10 5(G) Subpart B

Effective Date: October 1, 2014 203

to this Guarantee, Guarantor may not claim or assert any local or state law against

SBA to deny any obligation, defeat any claims of SBA, or preempt federal law.”

SOP (G), Page 202

Electronic Signatures

Effective January 1, 2015:

7(a) and 504 lenders may utilize electronic signatures in accordance with the performance standards outlined in Notice on SBA Forms and other documents requiring signatures

Electronic Signatures Cont.…

To maintain an electronic credit file for SBA loan customers, you can have all required documentation housed electronically as long as it can be made available (in either paper or electronic format) at the time of guaranty purchase or audit/review by OCRM. 

In addition, there are certain SBA forms and bank documents that must be retained in original format with original signatures. It includes authorizations, 912s, SBA application forms, and collateral documents such as notes, guaranties and security/mortgage documents. Also, Form 159 (for 7a) and whatever the lender needs to keep original/wet signatures that their regulator(s) and/or own legal wants.

7(a) Guaranteed Loan Program

Standard 7a

7a Small Loans

SBA Express

PLP

Maximum Loan Size = $5,000,000

The 7a Loan Guarantee Program

7 (a) Loan Program Details

• SBA’s Primary Business Loan Program

• Broad eligibility requirements

• Wide range financing options

• Maximum loan amount increased from $2 million to $5 million

• 85% guarantee on loans up to $150,000

• 75% on loans > $150,000

7(a) Loan Program

Maturities & Interest Rates

• 5-10 years for working capital, machinery, equipment

• Up to 25 years for real estate, construction

• Prime + 2.25% for loans of 7 years or less

• Prime + 2.75% for loans over 7 years

• Rates can be higher for smaller loans

7(a) Program Guarantee Fees

• 2% on loans up to $150,000*

• 3% on loans $150,001 - $700,000

• 3.5% on loans $700,001 -

• $ 1 million

• 3.75% on loans > $1 million

• *fee waiver for FY 15

Why Do Lenders Use the SBA Guaranty?

Longer maturities are needed Collateral may be inadequate to meet normal

underwritingStart-up or certain types of businessesBusiness leverageLender’s legal or policy limitMinimize risk

SBA Size Standard

Manufacturing from 500 to 1,500 employeesWholesaling 100 employeesServices from $4.5 million to $32.5 million in

average annual receiptsRetailing from $6.5 million to $26.5 millionGeneral construction from $6.5 million to $32

million

The 2010 Jobs Bill expands the number of businesses eligible for SBA loans by increasing the alternate size standard to those small businesses with less than $15 million in net worth and $5 million in average net income

www.sba.gov/size SOP (G), Page 76

Eligible Use of Loan Proceeds

SBA loans may be used to:

• Purchase machinery, equipment, fixtures, buildingsand land for business

• Finance receivables and augment working capital• Refinance existing debt - including credit card debt• Finance seasonal lines of credit• Expand, renovate facilities• Construct commercial buildings• Change of ownership/purchase of a business• Most legitimate business purposes

SOP (G), Page 107

Eligibility Requirements

• For profit• U.S. citizens or owners w/ green card status• Not exceed SBA size standards• Owners must be of good character• Owners must possess management ability

and have experience in field.• Demonstrate repayment ability• Not engaged in lending, real-estate

development, investments or speculation

Ineligible Use of Proceeds

• Repay delinquent IRS withholding taxes, sales taxes or similar funds held in trust.

• Provide or refinance funds used for payments, distributions, or loans to Associates of the Applicant, except payment of ordinary compensation for services rendered at a fair and reasonable rate.

SOP (G), Page 108

Loan Guaranty Percentages

7(a) loans under $150,000

7(a) loans over $150,000

SBA Express

85%

75%

50%

SOP (G), Page 125

SOP (G), Page 138

7(a) Guaranteed Loan Program Fees

Loan Size Fees Notes

$150,000 or less Zero

MaturitiesExceed 12 months

$150,000 - $700,000

3% of guaranteed

portion

$701,000 - $5,000,000

3.5% of guaranteed

portion (3.75% of guaranteed

portion over $1 million)

Short Term Loans –Up to $5 Million

0.25% of guaranteed

portion

Maturities of 12 months or less

Based on guaranteed portion

Full list found in SOP (G), Page 132

7(a) Loan Interest Rates

Vary by loan size and maturity

Credit Underwriting Standards

Credit Underwriting Standards Separated

7a small Loans

• Credit scored

7(a) over

$350,000

• Full Analysis

Any Expres

sLoan

• No change - Follows your bank’s procedures

Underwriting

Standards

Lets Talk SBA Express

Maximum Loan Amount: $350,000

Fast Turnaround time

Guaranty on a true Line of Credit

Express Benefits Continued…

Follows lenders’ own underwriting polices Can use a “credit score” model Can use credit cards to access the line of credit Lenders are not required to take collateral for loans up to

$25,000. Uses lenders own collateral policy for loans above $25,000 Do not have to take personal residence

Top Issues Found

No Express Authorization in Credit file

For LOC, must include maturity date in note Ex. On demand but no later than 04/xx/2022

SBA Credit Scoring for loans up $350,000

• All applications begin with credit scoring• Predict risk more accurately than complex underwriting• Similar to liquid credit from FICO/Dun & Bradstreet• Takes information from Business Credit Bureau to generate score

• Commercial loan, lease, and card data • Number of trades and utilization• Sales Figures• Number of years in business• Number of Employees• Ratio information as compared to industry averages

• Guarantor credit scores

Does not apply to SBA Express Loans

Credit Score a Loan

1) Begin in ETRAN

2) Input required data Loan details Owners of 20% or more name, SSN, address Business name, address, phone, EIN, DUNS (if

available)

3) Click the Check Credit Score button*

4) Credit Score will be generated

*soft credit hit to applicants

Loan scored less than 140?

• Resubmit under SBA Express for 50% guaranty

•No questions asked

Go SBA Express

•PLP lenders can use their delegated authority OR submit to LGPC for reconsideration

•Non-PLP lenders must submit the full 10-tab to LGPC for review

Send it in to SBA

Note: Lender does a full underwriting as required for a Large 7(a) loan

Credit Analysis

An Acceptable Credit Score indicates the applicant is credit worthy:- There is no need to discuss the following in your credit analysis:

- Credit history of the applicant- The strength of the business- Historical earning and projected cash flow- The applicants ability to repay the loan

- No debt service coverage requirement

- Financials still must be obtained, but don’t need to be spread

- IRS 4506-T is still required:- Verifies the business is small- Verifies the business pays taxes- Fraud prevention

Credit Analysis Continued…

- Still Must Cover:- Business History- Management Team Analysis

- Length of Time in business, undercurrent management, depth of the management, industry or related experience

- Analysis based on lender’s policies and procedures for similarly sized non-SBA guaranteed loans:- Owner/Guarantor Analysis

- PFS analysis- Obtain personal financials & complete an analysis based on personal

cash flow analysis or credit scoring- Equity and Debt-to-Worth must be analyzed- Equity injection requirements match lender’s similarly sized

non-SBA guaranteed loans

Collateral, Affiliates & Credit Memo

List collateral and estimated values, if secured Appraisals & formal valuations are not required unless they

would normally be required by the lender on non-SBA Guaranteed loans

Affiliates Consideration Size Determination Outstanding Guarantee Eligibility Repayment ability – will they positively or negatively impact

the borrower’s ability to repay the SBA Guaranteed loan

Credit Memo Template Part A states the customer’s credit score Part B covers the remaining points. SBA does not require you use our “template”

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What Else?

- Multiple Loans in a 90 day Period – Second loan takes the customer over the $350,000 Aggregate Customer’s Second Loan MUST be underwritten to

large 7a standards CASH FLOW ANALYSIS CANNOT BE WAIVED

- If a loan goes to purchase: - Debt Service Coverage will NOT be a point of

discussion at purchase if:- The loan was approved on or after July 1, 2014- The loan scored 140 or higher- The loan was not the companion loan that pushed the borrower’s

aggregate loan amount over $350,000 within a 90 day period

- Small 7(a) Loan Purchases will be handled in Little Rock

Credit Memo

 For Loans of $350,000 or Less

Lenders must verify and reconcile the applicant’s financial data against income tax data prior to submitting a request for guaranty for a loan of $350,000 or less using Standard, CLP, or PLP processing. Prior to submission for all non delegated loansPrior to disbursement for delegated loans

Equity InjectionLenders must verify the injection prior to disbursing loan proceeds and must maintain evidence of such verification in their loan files. Verifying a cash injection requires the following documentation:

A copy of a check or wire transfer along with evidence that the check or wire was processed showing the funds were moved into the borrower’s account or escrow;

A copy of the statements of account for the account from which the funds are being withdrawn for each of the two most recent months prior to disbursement showing that the funds were available; and

A subsequent statement of the borrower’s account showing that the funds were deposited or a copy of an escrow settlement statement showing the use of the cash.

A promissory note, “gift letter” or financial statement is not sufficient evidence of cash injection without corroborating evidence consistent with paragraph above

Lender must determine if the equity and the pro-forma debt-to-worth are acceptable based on its policies and procedures for its similarly-sized, non-SBA guaranteed commercial loans. If the lender requires an equity injection and, as part of its policies and procedures for its similarly-sized, non-SBA guaranteed commercial loans verifies the equity injection, it must do so for SBA loans.

SBA Application Process

Key Changes to Application Process

Universal set of forms for all 7(a) Lenders may use their own Note and Guaranty

forms Business Financial Statements required to be

dated within 180 days of submission to SBA, not 90

Personal financial statements to be dated within 90 days of submission to SBA

2 Forms for all 7(a) loans

BORROWER LENDER Fo

rm

1919

Form

192

0

Personal Financial Statement

Dated within 90 days of submission

Use your own form or SBA Form 413

Must be submitted for all officers, directors, principals and 20% owners, and spouses

SOP (G), Page 191

Business Financial StatementsYear End Balance Sheets and Profit/Loss

Statements for previous 3 yearsStatement of Net Worth Interim Balance Sheet and Profit/Loss

Statement ( no less than 180 days old) Cash Flow ProjectionSame statements for any

affiliates/subsidiaries

Used to determine if any of the individuals or businesses have outstanding Delinquent Federal Debt

CAIVRS

When?Bank approves the loan

• Ex. SBA Express, PLP

IF SBA approves the loan

• SBA will run report

Inquiries related to listing

SBA Procedural Notice 5000-1334

Inquires for individuals/business in CAIVRS are submitted to SBA’s Birmingham’s Offset Division

Only for positive hits in CAIVRS

SBA’s Tax Verification process is to determine if:

Small Business Applicant filed business tax returns; and

Small Business Applicant’s financial statements

provided as part of the application agree with the business tax returns submitted to the IRS.

IRS Form 4506-T(Request for Transcript of Tax Return)

When ?

Prior to 1st disbursement

Prior to submission

Non - Delegated

Delegated

SOP(G), Page 182

IRS Form 4506-T(Request for Transcript of Tax Return)

Required for the last 3 years(unless Borrower is a start-up business)

For a sole proprietorship, the lender must verify the Schedule C.

For a change of ownership, the lender must verify the seller’s business tax returns or a sole proprietor’s Schedule C. Where there is an acquisition of a division or a segment of an existing business, other forms of verification may be used in lieu of the 4506-T (e.g. Sales tax payment records).

SOP(G), Page 182

IRS Form 4506-T(Request for Transcript of Tax Return)

Important include signature, title, and date in bottom section

If a Small Business Applicant has not filed required federal tax returns, the applicant is

not eligible for SBA financial assistance

# 1 REASON SENT TO WRONG FAX NUMBER

SOP(G), Page 182

Form 912

If your borrower has answered “Yes” Question 1: APPLICANT IS NOT ELIGIBLE FOR AN SBA LOAN

If borrower answers “Yes” to Question 2 or 3:You must complete the 912 FORM

If response to question 3 reveals that he/she is

currently on parole or probation, then the Small Business Applicant is

not eligible.

912 Processing

• Normal Processing time is 6-8 weeks

• Name Checks take longer to process

• FBI recently installed new computer reporting system

SOP 50(G), Page 90

Real Estate Acquisition

If loan proceeds are to be used to purchase or construct real estate, we look for “owner occupancy”

Eligible Small Business must:

– Occupy 51% + of an existing facility or

– 60% of a newly constructed facility on day one, with expansion to 80% in 10 years

Debt Refinancing: Unreasonable Terms

Existing debt is presently on unreasonable terms if it is: a) short or long term debt structured with a demand note or balloon payment; b) debt with an interest rate that exceeds the SBA maximum interest rate for the processing method used; c) credit card obligations used for business related purposes; d) debt that is over collateralized (however, the SBA guaranteed loan must meet SBA collateral requirements). e) revolving lines of credit (short or long term) where the original lender is unwilling to renew the line or the applicant is restructuring its financing in order to obtain a lower interest rate or longer term; f) debt with a maturity that was not appropriate for the purpose of the financing (e.g. a 3 year term loan to finance a piece of equipment with a useful life of 15 years); g) debt used to finance a change of ownership under certain conditions h) debt the Lender believes no longer meets the needs of the Small Business Applicant.

SOP 50(G), Page 109

Debt Refinancing: Credit Card

Criteria: Used for business purposes The borrower must certify that the amount being refinanced was used exclusively for

business purposes and provide appropriate documentation, such as a copy of the note

and/or current loan statement, to demonstrate that the debt was, in fact, used

for business purposes.

SOP (G), Page 110

Debt Refinancing: Another Lender

Lender may refinance an existing non-SBA guaranteed loan or borrower debt

from another lender if: The existing loan no longer meets the needs of the

applicant

Requires “substantial benefit” to applicant

Looks to 10% improvement in monthly payments (P & I)

SBA requires copies of all notes that will be refinanced

Demand, interest only, balloon notes will automatically meet substantial benefit test

Debt Refinancing: Lender’s Own Debt

Must adhere to previous provisions In addition, must submit to SBA a transcript of

account showing that the debt has never been more than 29 days past due, within the last 36 month period.

New loan must not reduce the lender’s existing credit exposure to the borrower (only applies to Express)

CHANGE OF OWNERSHIP / BUSINESS VALUATION

If amount being financed (including 7(a), 504, seller) or any other financing (minus the appraised value of real estate and/or equipment being financed) is $250,000, or less, Lender can perform valuation.

If amount is more than $250,000, or if there is a close family relationship between buyer and seller, valuation has to be done by a “qualified source”

CHANGE OF OWNERSHIP/ BUSINESS VALUATION

A “qualified source” is an individual who regularly receives compensation for business valuations and is accredited by one of the following recognized organizations:

Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers;

Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers;

Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants;

Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts; and

Accredited Valuation Analyst (AVA) accredited through the National Association of Certified Valuation Analysts.

SOP (G), Page 167

Business Purchase Forms Needed

Copy of Buy-Sell AgreementSeller Financial Statements for previous

3 YearsPro forma Balance Sheets Interim Statements ( no less than 180

days old)

Collateral

One of the primary reasons lenders use SBA is for those

Small Business Applicants that demonstrate repayment ability

But lack adequate collateral to fully repay the loan if the loan defaults

SBA does not permit its guaranty to be used as a substitute for available collateral.

Collateral

Collateral is NOT required for loans of $25,000 or less Collateral is required on loans of more than $25,000 up to $350,000

with the lender following their own collateral policies & procedures for non-SBA guaranteed loans BUT at a minimum the lender must obtain a lien on the applicant’s fixed assets to secure the loan

For loans in excess of $350,000 the loan must be collateralized to the maximum extent possible UP TO THE LOAN AMOUNT

Trading Assets MAY be skipped with the lender going directly to personal real estate if trading assets are needed as collateral on a LOC

An SBA Guaranty CANNOT be used as a substitute for available collateral

Express collateral has not changed. Banks must follow same policies as non SBA portfolio.

All Requests for 7(a) Guarantee of loans greater than $350,000 processed through Standard, CLP, or PLP procedures,Lender’s analysis must demonstrate the Small Business Applicant’s ability to repay the loan from the cash flow of the business.The Analysis should conclude that repayment ability of the proposed SBA loan and all other debt reasonably exists from the operating cash flow of the business defined as earnings before interest, taxes, depreciation and amortization (EBITDA);

For loans above $350,000

The small business applicant’s debt service coverage ratio (OCF/DS) must be 1.15 to 1 or greater on a historical and/or projected

basis.

Debt Service Coverage

Submission of Application for Guaranty

All Submissions via E-Tran

Request User ID/Password

ETRAN

69

Input New loan

Serv

ice

E-Tran In Process Application

Save/Next

Navigation Tree

Lender Comments Tab

Allows for comments on the loan application

Reporting to Credit Bureaus

Lenders are required to report commercial account information

Submits reports to commercial credit bureau reporting agencies

Reporting of guarantors is not required

Servicing and Liquidation 7(a) Lender Matrix

All 7(a) lenders will be required to notify SBA via E-Tran for the following unilateral actions: - Cancel the SBA Guaranty* - Extend the Maturity Date (prior to the stated maturity expiring)* - Change the loan from revolving to non-revolving - Change the Borrower’s name or address - Assumption of the loan without release of an Obligor (adding a borrower) - Adding a Guarantor to the loan - Classify the loan in “liquidation” status

Matrix Continued…

Note: After entering the appropriate information into Etran, no further action is required

https://www.sba.gov/for-lenders

Little Rock Servicing Center

Lrsc.servicing@sba.gov

SBA One

Upcoming Events

For more information, please contact Matt Sisk at 617-565-5569 or matthew.sisk@sba.gov

Rhode Island’s SBW Celebration: May 13th at noon Alpine Country Club Cranston, RI

MA District Office SBA Contacts

Tipp O’ Neill Federal Building

10 Causeway Street Room 265

Boston, MA 02222

Anne Hunt

Deputy District Director

617-565-5577

Anne.Hunt@sba.gov

Carlos Hernandez

Lender Relations Specialist

617-565-5565

Carlos.hernandez1@sba.gov

Gregory GouldLender Relations SpecialistU.S. Small Business Administration380 Westminster Street - Suite 511Providence, RI 02903 

(401) 528-4630Gregory.Gould@SBA.gov