U.S. Small BusinessAdministration

SEED lender training 4-3-14

# 3 in 7a loans (3/21/14)

LOS ANGELES DISTRICT OFFICE  884

MICHIGAN DISTRICT OFFICE  864

MASSACHUSETTS DISTRICT OFFICE 

814

LOS ANGELES DISTRICT OFFICE  153

ILLINOIS DISTRICT OFFICE  140

SOUTH FLORIDA DISTRICT OFFICE  133

MINNESOTA DISTRICT OFFICE  108

SANTA ANA DISTRICT OFFICE  103

MICHIGAN DISTRICT OFFICE  102

SAN FRANCISCO DISTRICT OFFICE  100

MASSACHUSETTS DISTRICT OFFICE 

95

# 3 overall (7a & 504 combined) 3/21/14

LOS ANGELES DISTRICT OFFICE  1,037

MICHIGAN DISTRICT OFFICE  966

MASSACHUSETTS DISTRICT OFFICE 

909

As of 3/21/14 # 1 in loans $150,000 and less!

MASSACHUSETTS DISTRICT OFFICE 283

LOS ANGELES DISTRICT OFFICE 271

NEW YORK DISTRICT OFFICE 237

Break Out of MA lending by units, (3/21/14)

504

ALP

CA

CLP

EWCP

Export Express

GO Loans

Inter Trde

Other 7(a)

Patriot Express

PLP

RLA

SBAExpress

SLA

Grand Total

10

85

3

0

1

4

0

0

12

18

72

0

617

87

909

SBA Fees in FY2014 thru 9/30/14

All SBA 7(a) Loans of $150,000 or less have: NO Guaranty fee NO on-going servicing fee for the lender

Loans above $350,000: on-going servicing reduced to @.52basis points

As of 1/1/2014 ALL SBA Express loans to VETERANS (Patriot Express expired on Dec 31st, 2013) No guaranty fee up to $350,000

It Made a Difference!

Regionally…………. FY `13 – 73% of loans were <= $150,000 FY `14 (thru 1/31) – 81% of loans are <= $150,000

FY `13Through 1/31

FY `14Through 1/31

MA 73% 86%

NH 74% 81%

VT 72% 74%

ME 73% 77%

RI 65% 79%

CT 56% 67%

www.sba.gov/ma

FY 14 YTD: (10/1/13 - 2/21/14)

7(a) "Estimated " Borrower Fee Relief for loan sizes less than = to $150K

FEE RELIEF:

$6.3M – US$315K - MA

What is a SBA Loan?

It’s a Guaranty LoanLender disburses their dollars

Lender ServicesLender Liquidates

SBA’s guaranty offsets lender’s risk

“On SBA-guaranteed loans, the cash flow of the Small Business Applicant is the

primary source of repayment, not the liquidation of collateral. Thus, if the lender’s

financial analysis demonstrates that the Small Business Applicant lacks reasonable

assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the

collateral available.”

PREMISE OF SBA LENDING

Standard 7(a)Loan Processing Centers: Located in Citrus Heights, California and Hazard, Kentucky:

Processes Standard 7(a), Small Lender Advantage and the Community Advantage loan programs

Sacramento Loan Processing Center:Processes 504 loan programs

Commercial Loan Service CenterLocated in Little Rock, Arkansas:

Services SBA loans for the eastern half of the United States, and handles liquidation of 504 loans, processing of guaranty purchase requests and the liquidation of defaulted loans made

under the SBA Express programs.

Loan Guaranty Purchase CenterLocated in Herndon, Virginia

Processes requests to honor loan guaranties on 7(a) loans.

VARIOUS DELIVERY METHODS

The Agency guarantees 7(a) Program Loans through various methods including: 1. Standard 7(a) Guaranty a) Small Loans up to and including $350,000 ("Small Loan Advantage (SLA)") b) Loans over $350,000 to $5,000,000

2. Certified Lenders Program (CLP) a) Small Loans up to and including $350,000 ("SLA") b) Loans over $350,000 to $5,000,000

3. Preferred Lenders Program (PLP) a) Small Loans up to and including $350,000 ("SLA") b) Loans over $350,000 to $5,000,000

4. SBA Express (delegated)

5. Export Express (delegated) 6. Community Advantage (Pilot Program) a) Loans up to and including $250,000 (covered by a separate Community Advantage Participant Guide)

www.sba.gov/ma

Eligibility Requirements Be operated for profit U.S. citizens or owners with verified

“green card” status Not exceed SBA size standards Owners must be of “good character” Meet SBA’s “personal resource test” Owners must possess management

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

development, investments or speculation

Ineligible Businesses

Certain business types are ineligible for SBA assistance. A non-profit business Primarily engaged in lending A passive business owned by developers or landlords that do not actively

use or occupy the assets acquired or improved with the loan proceeds that is not an Eligible Passive Company discussed below (e.g. shopping center)

A life insurance company (life insurance agents, however, may be eligible) Located in a foreign country or owned by undocumented aliens Selling through a pyramid or multi-level sales distribution plan Deriving more than one-third of gross annual revenue from legal gambling

activities Engaged in any illegal activity Restrict patronage for reason other than capacity A government-owned entity (a small business owned or controlled by a

Native American tribe may be eligible if the business is a legal entity separate from the tribe)

Ineligible Businesses

Certain business types are ineligible for SBA assistance.

Principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs

A consumer or marketing cooperative (producer cooperatives may be eligible) Earning more than 1/3 of its gross annual revenue from packaging SBA loans Business with an associate who is incarcerated, on probation, on parole, or has been

indicted for a felony or a crime of moral turpitude Business in which the Lender or any of its associates owns an equity interest Business which presents live performances of a prurient sexual nature or derives

more than 5 percent of its gross revenue from the sale of products or services, or the presentation of any depictions or displays of a prurient sexual nature

Business that has defaulted, or has a principal who has defaulted, on a Federal loan or Federally-assisted financing resulting in the Federal government sustaining a loss, (unless waived by SBA for good cause)

Primarily engaged in political or lobbying activities Speculative in nature (such as a shopping center developer, oil wildcatting, or

primarily engaged in R&D)

Eligible Use of Proceeds

SBA loans may be used to: Purchase machinery, equipment, fixtures, buildings

and land for business; Finance receivables and augment working capital; Refinance existing debt - including credit card debt (with

compelling reason); Finance seasonal lines of credit; and/or Expand, renovate facilities; Construct commercial buildings. Change of ownership/purchase of a business Most legitimate business purposes

Debt Refinancing Criteria

A 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 (for example if the current loan is a term

loan and a revolver is needed) Requires “substantial benefit” to applicantLooks to 10% improvement in monthly payments

(P & I)SBA requires copies of all notes that will be

refinancedDemand, interest only, balloon notes will

automatically meet substantial benefit test

Debt Refinancing Criteria

Home Equity Line of Credit (HELOC) or Credit Card Debt that was 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. For example, a sole proprietor may demonstrate that the

debt was used for business purposes by providing a copy of the note and documentation that shows the debt is

reflected on the business balance sheet and/or the interest deduction is reported on the Schedule “C” not the Schedule “A” of the proprietor’s tax return. If the interest deduction reported on the Schedule C includes multiple debts, then the applicant must provide a copy of the appropriate IRS

Form 1098 related to the debt being refinanced

Refinance

Refinancing Same Institution Debt Late is defined as any payment made 29 days beyond the due date or

maturity Transcript for past 36 months or life of loan (whichever is less) must be

included showing due dates & when payments were received as part of the credit analysis

Refinancing an SBA Guaranteed Loan Evidence must be retained in the file showing the existing lender was

unwilling to approve an increase in the loan amount or a second loan and/or the lender is unwilling or unable to modify the current payment schedule

The Borrower or the new lender may obtain this documentation Refinancing an existing 504 using 7a

A 7a loan can be used to refinance an existing 504 as long as it meets refi requirements PLUS either:

Both the 3rd Party & 504 loan are being refinanced OR The 3rd Party loan has been paid in full & the 504 needs to be refinanced as

part of a larger transaction to facilitate an expansion or renovation to the project property

504 pre-payment penalties CANNOT be waived

Ineligible Use of Proceeds

To repay delinquent IRS withholding taxes, sales taxes or similar funds held in trust.

To 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.

Relocation of the business out of a community if there will be a net reduction of one-third of its jobs or a substantial increase in unemployment in any area of the country unless the relocation is for key economic reasons crucial to the applicant and the benefits to the applicant and the receiving community outweigh the negative impact on the community from which the applicant is moving.

Community improvements, such as curbs and sidewalks, in excess of 5 percent of construction proceeds of this loan.

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

Lenders should be guided by the Eligibility Questionnaire which is part of the loan

applicationIn doubt?

If you are comfortable, but not 100% sure… Print the page from the SOP that lead you to your

decision and include it in the file. Ask 7aQuestions@SBA.gov. Include their answer in

the file. Call us, we will research the SOP and reiterate its

contents – not make a determination. Use conventional 7(a).

Determination of Eligibility

2008

Credit Elsewhere Acceptable factors that demonstrate an identifiable weakness in the credit or exceed policy limits of the lender include, among others: a) The business needs a longer maturity than the lender’s policy permits (for example, the business needs a loan that is not on a demand basis); b) The requested loan exceeds either the lender’s legal lending limit or policy limit regarding the amount that it can lend to one customer; c) The lender’s liquidity depends upon selling the guaranteed portion of the loan on the secondary market; d) The collateral does not meet the lender’s policy requirements; e) The lender’s policy normally does not allow loans to new businesses or businesses in the applicant’s industry; and/or f) Any other factors relating to the credit that, in the lender’s opinion, cannot be overcome except for the guaranty. These other factors must be specifically documented in the loan file.

The lender must certify that credit is not otherwise available by signing the Lender Official block on the appropriate application form.

Financing-What does SBA look for?

Owners and operators w/ good credit & characterFeasible business plan

Management expertise and commitment necessary for successSufficient funds, including SBA guaranteed loan, to operate the

business on a sound financial basisAdequate equity investment in the business

Sufficient collateral, however, SBA is a cash flow lender and not a collateral lender.

Ability to repay the loan on time from the projected operating cash flow.

Based on intended use of proceeds Inventory or Working Capital – 10 Years Equipment

10 years Up to 25 years with documentation to support

useful life Real Estate – 25 years + construction period Mixed Purpose

Blended based on use of proceeds or Maximum for the largest asset class

Maximum Maturities

7a Interest Rates

Loan Amount Maturity Maximum Rate

Loans $25,000 or less (Maturity less than 7 yrs.) Base Rate + 4.25%

Loans $25,000 or less (Maturity over 7 yrs.) Base Rate + 4.75%

Loans $25,001 to $50,000 (Maturity less than 7 yrs.) Base Rate + 3.25%

Loans $25,001 to $50,000 (Maturity over 7 yrs.) Base Rate+ 3.75%

Loans over $50,001 (Maturity less than 7 yrs.) Base Rate + 2.25%

Loans over $50,001 (Maturity over 7 yrs.) Base Rate + 2.75%

Express Rates

Loans $50,000 or less Prime + 6.5%

Loans $50,001 or more Prime + 4.5%

The rate used is the one in effect on the date SBA receives the complete application.

For current rates, please visit www.colsonservices.com/main/news.shtml

Current rates are also located on the For Lenders main page.

SBA Size Standard

• Manufacturing from 500 to 1,500 employees• Wholesaling 100 employees• Services from $4.5 million to $32.5 million in

average annual receipts• Retailing from $6.5 million to $26.5 million• General 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

Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.

SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists.

Control may be affirmative or negative. Negative control includes, but is not limited to, instances where a minority shareholder has the ability, under the concern's charter, by-laws, or shareholder's agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.

Affiliation may be found where an individual, concern, or entity exercises control indirectly through a third party.

In determining whether affiliation exists, SBA will consider the totality of the circumstances, and may find affiliation even though no single factor is sufficient to constitute affiliation.

~ page 92www.ecfr.gov

13.121.103

AFFILIATES

4506-T SBA’s Tax Verification process is to determine if:

The Small Business Applicant filed business tax returns; and

The Small Business Applicant’s financial statements provided as part of the application agree with the business tax returns submitted to the IRS.

Please note: for loans up to $350,000. verification must be done prior to loan submission

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).

If the business has been operating for less than 3 years, lender must obtain the information for all years in operation.

Personal Financial Statement

Can use SBA 413 or lender form

Must be less than 90 days old

Must be submitted for all officers, directors, principals and 20% owners, spouses and children's assets.

Liquid Resource Test

Total Financing Package (TFP) – includes SBA loan(s), equity injection, and any other financing

Applies to each 20% owner (including spouse and dependent children)

WHEN TFP IS:

<$250,000 – 2 x TFP or $100,000 whichever is the greater>$250,001 < $500,000 – 1 ½ x TFP or $500,000 whichever is the greater>$500,000 – 1 x TFP or $750,000 whichever is the greaterOnce the exemption is determined, it is subtracted from the liquid assets. If the result is positive, that amount must be injected into the project.

Liquid Assets Include:

• Cash or Cash equivalents including: savings accounts, CDs, stocks, bonds or similar assets

• Cash surrender value of life insurance

DOES NOT INCLUDE: Retirement accounts or closely held non-marketable stocks or

equity in real estate

Good News!

Regulations Effective April 21, 2014:

• Personal Resource Test eliminated

(for both 504 and 7(a))

What Hasn’t Changed as of 1/1/14?

Loan guaranty amounts remain the same Traditional 7a loans of $150,00 or less = 85%; greater than $150,000

= 75% SBA Express loans 50% Export Express loans of $350,000 or less = 90%; greater than

$350,000 = 75%

Credit decisions are based upon the Borrower’s ability to repay – SBA is a cash flow lender

Most eligibility rules stayed the same Size standards haven’t changed (but don’t

forget about affiliates) Most things…

What Has Changed? All non-Express 7a loans of $350,000 or less

will be processed “SLA like” Tax Transcript Requirement DUNS Number - Recommended Simplified Forms Simplified Life Insurance Rules Clarification provided for

- Debt Service Coverage Ratio Requirements

- Credit Memo Requirements- Collateral

- Debt Refinance- Timing of 1502 Reporting- Prior Loss to the

Government

What has changed?Continued

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

912 Only required when an issue is revealed on Form 1919

1502 Reporting to Colson begins as soon as a loan number is issued.

If the lender uses its own note form, the lender must ensure that the note is legally enforceable and assignable, has a stated maturity and is not payable on demand. In addition, if the lender uses its own note form, the note must include the following language: “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.”

If the lender uses its own guaranty form, the guaranty must include the following language: “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 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.”

Other SOP Changes

effective January 1, 2014

SBA 7a loan can be used to refinance an existing 504 - Prepayment penalty & debt refi rules still apply

• Financials are current if within 180 days (PFS 90 days)

- must be dated & signed

• All 7a requests submitted via ETRAN or electronically:

- Supporting documentation can be submitted using ETRAN Document upload or Send this File (remember to include the APP number if sending via Send this File)

- Email is NOT secure & has size limitations, so STRONGLY discouraged for supporting documentation submission and not acceptable for application submission

- Loans must be submitted via e-tran

Loan submissions:

Standard 7(a), CLP, and CAPLines (non-delegated) applications must be sent via E-Tran, or to the 7(a) Loan Guaranty Processing Center (“LGPC”) electronically.

1. Email: 7aloanprogram@sba.gov - attachments less than 9 megabytes in size.

2. Website: - http

://www.sba.gov/aboutsba/sbaprograms/elending/lgpc/index.html

- click on “Submit 7(a) Document Here” or “sendthisfile.com”

SBA One

There will now be Minimum Credit Underwriting Standards Separated Between:

Those Used on any Request for Guaranty Processed through Standard, CLP, or PLP Procedures and for $350,000 or less.

Those Used on any Request for Guaranty Processed through Standard, CLP, or PLP Procedures for more than $350,000

Express Loans – no changes made to program

SLA Moniker

Where the initials “SLA” are used in this SOP, it refers to any loan up to and including $350,000 where the Request for Guaranty is Processed through Standard, CLP, or PLP Procedures

The former SLA Underwriting Standards are the Standards for Loans of $350,000 or Less

7(a) loans up to $350KAll Small 7(a), also known as SLA loan applications will be credit scored by SBA prior to loan approval (or issuance of a loan number if processed by a PLP lender).

The credit score is calculated based on a combination of consumer credit bureau data, business bureau data, borrower financials, and application data. (not be confused with the Small Business Predictive Score (SBPS) used in lender portal.The minimum credit score is based on the lower end of the risk profile of the current SBA portfolio and may be adjusted up or down from time to time. The minimum score will be posted on SBA website. The current minimum SLA credit score is 140

000-099

100-109

110-119

120-129

130-139

140-149

150-159

160-169

170-179

180-189

190-199

200-209

210-219

220-229

230-300

37%

29%26%

22%17%

12%7%

5% 3% 2% 2% 1% 1% 1% 0%

Purchase Ratesby SBPS Score Band

FICO/D&B’s LiquidCredit scores use commercial and consumer data to predict purchase risk.

FICO/D&B developed the suite using loan, lease, and card data from lenders nationwide.

Small business credit scores are compensatory. Criteria do not have hard-cutoffs, and scores

do not always use all criteria or data sources.

Credit Scores Will Predict Risk More Accurately and Simply Than Complex Underwriting

Source: SBA Loan/Lender Monitoring System.

Below 140: 21%

Above 140: 3.7%

Small Business Credit Scores Accurately Predict Purchase

This Score Suite is an Industry-Standard Decisioning Tool

Large National Banks Smaller Regional Banks

KeyBank AgriLand Farm Credit Services (TX)

Huntington National Bank Five Star (NY)

PNC Glenview State (IL)

RBC Rockland Trust (MA)

USBank Associated Bank (WI)

Zions Bank First Volunteer (KY/TN)

HSBC Bank of Idaho

Sovereign Bank Union Bank of California

Banks across the country use the suite for evaluating borrower risk.

Under the new Small Loan Advantage, SBA will only approve loans scored above 140.

Sample Users of Small Business Credit Scores

Source: Dun & Bradstreet, Fair Isaac Corp.

SBSS scores use commercial and consumer data to predict purchase risk

Example Disqualified Profile

SBSS Score 119589

10

120

Utilization: >75%. Delinquencies: 6.

Example Qualified Profile

SBSS Score 178782

0

120

Utilization: 0. Delinquencies: 0.

FICO score

# of inquiries

Average months in file

Etc.: Credit utilization

55%

Less than 2 years

2

Poor paydex. 1 line; avg. 60 days delinquent.

100%

More than 2 years

0

Good paydex. 4 lines; 0 past terms.

% sat. trade lines

Time as current owner

Total # suits

Etc.: Paydex, trade lines

Less than $75k

Less than 2 years

Less than $100k

Sales: <$500k. Employees: 0. Mining industry.

More than $75k

More than 2 years

More than $100k

Sales: >$500k. Employees: >2.

DDA total balance

Time as current owner

Principals’ combined net worth

Etc.: Sales, employees, industry Low

55%

Low

High

100%

High

Cash-to-assets ratio

Current ratio

EBIT-to-interest ratio

Cre

dit

b

ure

au

Bu

sin

ess

bu

reau

Ap

pli

cati

on

Fin

an

ci

als

Source: Dun & Bradstreet, Fair Isaac Corp.

Before obtaining an SBSS score you must input information about the small business borrower and small business principals into E-tran

Business Data Required Business legal name Business address Business phone Tax ID (EIN) DUNS number

(suggested)

Principal Data Required First name Last name SSN Address

Required for each principal owner with 20% or more equity share of the applicant small business

Once all required information is entered into E-Tran, the ‘Check Credit Score’ icon will appear Note: An SBSS score can be generated by entering the above information into E-tran (as described in the successive slides) however the loan cannot be submitted for an SBA loan number until the application is complete

For Loans of $350,000 or LessThe lender’s credit memo must include:

With the exception of loans under $50,000, the small business applicants global cash flow coverage is equal to or exceeds 1:1 on either a historical or projected cash flow basis. – does not have to occur year 1

Document in the loan file the definition or formula used to calculate the global cash flow

Credit Memo

For Loans of $350,000 or LessThe lender’s credit memo must include:

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

Credit MemoContinued

For Loans of $350,000 or LessThe lender’s credit memo must include:

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 as part of its policies it must do so for SBA loans.

Credit MemoContinued

Loans Over $350,000

For 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);

Lender’s Analysis

For Loans Over $350,000

Operating Cash Flow (OCF) is defined as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

Calculating Repayment

For Loans Over $350,000

In order to determine EBITDA, the Lender must make appropriate adjustments - Additions & Subtractions to cash flow such as:

Unfunded capital expenditures; Non-recurring income; Expenses and distributions; Distributions for S-Corp taxes; Rent payments; Owner’s Draw; and/or Assessment of impact on cash flow to/from any affiliate

business

Determining EBITDA

For Loans Over $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

Credit Memo

For Loans Over $350,000The Lender’s Credit Memo Must Include:

• Analysis of historical cash flow that demonstrates total debt service coverage including the SBA loan and other balance sheet debt; or

• Analysis of projected cash flows, (start-ups and expansions) that demonstrates total debt service coverage including the SBA loan and other balance sheet debt, with detailed assumptions in support of projections.

• Spread of pro-forma Business Balance Sheet (current business balance sheet + changes in assets and liabilities as a result of the loan, other debt, any required equity injection and use of proceeds)

For Loans Over $350,000The Lender’s Credit Memo Must Include:

Ratio calculations (based on the pro-forma Balance Sheet and historical and projected Income Statements) as described in the SOP.

Ratio calculations (based on the pro-forma Balance Sheet and historical and projected Income Statements) for the following financial ratio benchmarks: Current Ratio, Debt/Tangible Net Worth, Debt Service Coverage,

and other ratios the lender considers significant for the business/industry (e.g., inventory turnover, receivables turnover, and payables turnover, etc.);

Analysis of working capital adequacy to support projected sales growth in next 12 months

Ratio Calculations

Equity Requirement forloans in excess of $350,000

Amount of Equity Adequate equity is important to ensure the

long term survival of a business. The lender must determine if the equity and the pro forma debt-to-worth are acceptable based on the factors related to that type of business, experience of the management and the level of competition in the market area. The lender must include in its credit analysis a detailed discussion of the required equity and its adequacy.

Cash that is not borrowed

Cash is borrowed if;Applicant can demonstrate repayment of this personal loan from sources other than the cash flow of the business, the cash injection may be considered equity. Salary of business owner does not qualify Any loan made to an individual for the purpose of providing

an equity injection into the business must be disclosed.– Lender’s credit analysis must address the impact on the personal

and business balance sheets and sources of repayment for such side loans.

If the SBA participating lender is providing the personal loan, the lender must submit the application for guaranty through standard 7(a) processing.

~ page 187

SOURCE OF EQUITY

Equity Injection

Lenders 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.

Specific requirements for debt service coverage and EBITDA calculations have been added

Operating Cash Flow defined as: earnings before interest, taxes, depreciation and amortization (EBITDA)

Minimum debt service coverage must be 1.15 to 1 or greater

SUMMARY Loans Over $350,000

7a Underwriting& Credit Analysis

Loans of $350,000 or Less Submit via ETRAN Loan will be prescreened in ETRAN

If SCORE is not acceptable app Express or Loan Processing Center approval may be used

Credit Memo includes: Cash flow analysis reflecting ability to repay with a DSCR of 1:1 or

better History of the business, length of time in business & discussion of

management Loans of $50,000 or greater must show repayment ability based

upon Global Cash flow (GCF DSCR of 1:1 or better) Analysis of business strength, deposits, credit history, etc.– Owner/Guarantor including PFS consistent w/non-SBA loans– Equity & pro-forma debt to worth must be acceptable based on

lender’s policy for non-SBA loans– Equity injection required consistent with lender’s non-SBA loans– Must collect and analyze business tax returns (verify with IRS prior

to submission)

7a Underwriting& Credit Analysis

Loans of more than $350,000 Submit via ETRAN Loans will not be prescreened in ETRAN Credit Memo includes:

Cash flow analysis reflecting ability to repay with a DSCR of 1.15:1 or better Repayment analysis based upon historical cash flow or projections if business is new or

expanding History & nature of the business; length of time in business, management depth &

industry experience Assessment of repayment ability based upon EBITDA (Operating Cash Flow) divided by

debt service (12 months P & I payments including new loan Adjustments to EBITDA should be made when necessary (unfunded cap. Expenditures;

non-recurring income; expenses & distributions; S-Corp taxes; rent; owner’s draw; impact of affiliates, etc.)

If using projections analysis of assumptions including reason for reduced expenses & revenue growth

Pro-forma balance sheet, ratio calculations (current ratio, debt/net worth, DSC, & any others considered relevant)

Working capital analysis to support projected sales grown in next 12 months Collateral adequacy assessment Explanation and justification for debt refinancing Lender rational for recommending loan approval

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

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

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

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.

When is a loan considered“Fully Secured”?

Liquidation value of the collateral taken is equal to the loan amount Adjusted Net Book Value = The Asset’s original price minus

depreciation & amortization Senior Lien Amounts must be subtracted from the value calculating

to determine if Fully Secured Lender must take the following until the “fully secured” mark is hit:

All assets acquired with proceeds Any other fixed business assets Business trading assets Personal residential & investment property

New Equipment – 75% of net book value or 80% of orderly liquidation appraised value

Used Equipment – 50% of net book value or 80% of orderly liquidation appraised value

Commercial Real Estate – 85% of appraised value Residential & Investment Real Estate – Lender’s normal valuation for

non-SBA guaranteed loan Trading Assets – 10% of current book value & only must be taken if

lender does on similarly sized non-SBA guaranteed loans

Franchises & Size Determination

The term “franchise agreements” refers to all franchise, license, dealer, jobber or similar agreements

The two parties involved in any of those agreements are referred to as “franchisor” & “franchisee”

The agreement cannot exert undo control over the franchisee or an affiliation exists

Franchise Agreement Review & Determination Loans processed through Citrus Heights except CLP – SBA Review PLP, SBA Express, other delegated processing methods – Lender

Review or they can be submitted to DelegatedFranchiseReviews@sba.gov

Check www.franchiseregistry.com to see if the franchise agreement has been approved previously by the SBA Franchise Committee for size/affiliation & control issues

If not on the Franchise Registry check the SBA Franchise Findings List available at www.sba.gov/content/franchise-findings

Check For Prior Lossor Debarment

Delegated lenders are responsible for accessing the records in E-Tran to determine if any of the individuals or businesses experienced a Prior Loss. Lenders must check CAIVRS for borrowers

Individuals and entities suspended, debarred, revoked, or otherwise excluded under the SBA or Government-wide debarment regulations are not permitted to conduct business with SBA, including participating in an SBA-guaranteed loan. Lenders must check SAM for employees/agents

CAIVRS is used to determine if a loan applicant has a Federal debt that is currently in default or foreclosure or has had a claim paid by the reporting agency within the last 3 years.

Unless, you are sending the loan package to SLP for a decision, you must pull a report and maintain in your file.

If you are not set up for CAIVRS, please contact me as soon as possible for instructions on how to get access.

CAIVRS

Enter your User ID and Password into the “pop up box.” 

CAIVRS Prescreening is where

you enter the tax id numbers for the small businesses (EIN) and the owners/guarantors (SSN).

Limit of 5 per inquiry screen.

Enter your Lender EIN number (tax id). (Do not enter any dashes or spaces in the EIN number.)

For SBA loans, your lender ID is your company's tax ID (EIN), followed  with a capital "T".  Enter your company's nine digit Tax ID in the lender ID box, DO NOT USE ANY DASHES, followed immediately with a capital "T" (*********T).

For the Agency, select Small Business Administration.

  Press send.

What To Enter To Receive A Report

What Do I Do With The CAIVRS Report

If the report results show no delinquent federal debt:

Print a copy and include it in your loan file.

If the report results do show a delinquent federal debt:

Print a copy for your loan file.Call the phone number shown on the report.Supply the information to the applicant.Have the applicant get the debt resolved.Have the applicant bring you verification, from the agency in question, that

the debt has been satisfied.Keep the verification documents in your loan file.

Other Items of Note…

A “qualified source” is an individual who regularly receives compensation for business valuations and is accredited by one of the following recognized organizations: 1. Accredited Senior Appraiser (ASA) accredited through the

American Society of Appraisers; 2. Certified Business Appraiser (CBA) accredited through the

Institute of Business Appraisers; 3. Accredited in Business Valuation (ABV) accredited through

the American Institute of Certified Public Accountants; 4. Certified Valuation Analyst (CVA) accredited through the

National Association of Certified Valuation Analysts; and 5. Accredited Valuation Analyst (AVA) accredited through the

National Association of Certified Valuation Analysts. Refinance of change of ownership debt no longer

requires a valuation

Benefits to Express

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

Express Activity (3/21/14)

Nationally: 51% of all loans approvedMA: 76% of all loans approved

Express Credit

SBA has authorized SBA Express, Export Express and SBA Veterans Advantage to make the credit

decision without prior SBA review. The credit analysis must demonstrate that there is a

reasonable assurance of repayment. The lender is required to use appropriate, prudent and generally

accepted industry credit analysis processes and procedures (which may include credit scoring), and

these procedures must generally be consistent with those used for its similarly sized non-SBA

guaranteed commercial loans. Lenders that do not use credit scoring for their similarly sized non-SBA guaranteed commercial loans may not use credit

scoring for SBA Express or Export Express.

Veterans Advantage

SBA developed the SBA Veterans Initiative to support the entrepreneur segment of the Nation’s military community (including

spouses). This initiative uses streamlined documentation and processing features as SBA

Express.

Must be processed thru ETRAN Maximum Loan amount - $350,000

Guaranty 50%Currently loan fees are waived for veterans up

to $350K

Veterans AdvantageEligibility for Veterans Advantage is limited to businesses that meet SBA’s standard

eligibility requirements discussed above and that are 51% or more owned and controlled by an individual or individuals in one or more of the following groups:

Veterans

Service Disabled Veterans

Soon to be discharged active-duty service members eligible for the military’s Transition Assistance Program

Active Reservist and National Guard Members

Current spouses of any of the above

The widowed spouse of a service member or veteran who died during service or of a service-connected disability

Veterans Advantage

Lenders must document in their loan file a borrower’s eligibility for Veterans Advantage using the following DOD/DVA documentation, including the 51% ownership by the above, and must present copies of that documentation with any request to SBA to purchase:

a) Veteran: Copy of Form DD 214, which is provided for other than dishonorably discharged veterans. b) Service-Disabled Veteran: Copy of Form DD 214 or documentation from the DVA that the veteran has been determined as having a service-connected disability. c) Service Member: DOD photo card (Geneva Convention Identification Card) and Form DD 2648 (active duty service member) or Form 2648-1 (reserve component member).

d) Transitioning Active Duty Military Member: DD Form 2, "U.S. Armed Forces Identification Card (Active)," or DD Form 2, "Armed Forces of the United States Geneva Conventions Identification Card (Active)" and, DD Form 2648 (Active Duty Military member) or DD Form 2648-1 (Reserve Component member ). e) Reservists and National Guard: DD Form 2, Armed Forces of the United States Identification Card (Reserve). f) Current Spouse of Veteran: The veteran’s Form DD 214 and evidence of status as a current spouse. g) Current Spouse of Transitioning Active Duty Military Member or Current Reservist/National Guard Member: DD Form 1173, Department of Defense Guard Reserve Family Member Identification Card and evidence of status as the current spouse. h) Widow of Active Duty Service Member who died in service or Widowed Spouse of Veteran who died of a service connected disability: Documentation from DOD or from DVA clearly showing this to be the case.

Export Express

The Export Express Program is designed to help SBA meet the export financing needs of small businesses too small to be effectively met by

existing SBA export loan guaranty programs. It is generally subject to the same loan

processing, making, closing, servicing, and liquidation requirements as well as the same maturity terms, interest rates, and applicable

fees as the SBA Express Loan Program. Increased Maximum Loan amount - $500,000

Increased Guarantee – 90% for loans of $350,000 or less - 75% for loans over $350,000

up to $500,000.

Export Express

Additional Eligibility Requirements for Export Express

a) Must have been in operation, although not necessarily in exporting, for at least 12 full months. However, applicants that have been in operation for less than 12 months are eligible if both of the following conditions are met:

(1) The applicant’s key personnel have clearly demonstrated export expertise and substantial previous successful business experience, and

(2) The lender processes the Export Express loan using conventional commercial loan underwriting procedures and does not rely solely on credit scoring or credit matrices to approve the loan. Evidence of compliance with both of these requirements must be retained by the lender in its file.

b) Small Business Applicants with operations, facilities or offices overseas, other than those strictly associated with the marketing and/or distribution of products/services exported from the U.S., are not eligible for Export Express, although they may be eligible for other SBA 7(a) financial assistance.

c) Lender must maintain in its loan file information provided by the borrower as it pertains to the use of proceeds for export development activities and its projected impact on the borrower’s export sales along with an estimate of the borrower’s export sales for the 12 month period following the date of the loan application.

Form 912

If your borrower has answered “yes” to any of the following questions:

Are you presently under indictment, on parole or probation?

(IF YES, APPLICANT IS NOT ELIGIBLE FOR AN SBA LOAN) or

Have you been arrested in the past 6 months for a any criminal offense or

Have you ever been convicted, plead guilty, plead nolo contendere, placed on pretrial diversion, or placed on any form of probation, including probation before judgment other than a minor vehicle

violation?

If so

You will need to complete the 912 FORM

Form 912

If there is a “yes” response, the lender must take the following actions:

The lender must obtain a complete understanding of the reason(s) for the “yes” response and when necessary for clarification, the lender must obtain additional written explanation from the Subject Individual to include the following:

(a) Date of the offense(s) including month, day and year. If the actual day is not known, include the month and year.

(b) City and state or the county and state where the offense(s) occurred. (c) The specific charge(s) [DUI, assault, forgery, robbery etc.] AND the level of the

charge; (either a misdemeanor or felony). (d) Disposition of the charge(s). This may include but is not limited to the following: (i) Any fines imposed; (ii) Any class or workshop to be attended; (iii) Any jail time served; (iv) If applicable, the terms of probation (including evidence and dates of successful

conclusion of the probation); or (v) Any other court conditions (such as registration as a sex offender). (e) Assuming the court’s conditions have been met, the applicant should state that all

conditions of the court have been satisfied in his explanation and provide court documents evidencing that these conditions were met.

(f) The borrower’s dated signature on the explanation.

Form 912

If the affirmative activity is not the 3 minor offenses over 10 years or 1 single misdemeanor as indicated in previous slide, the lender cannot clear the application for processing, the Form 912 and any supporting documentation must be sent to the MA District Office, which will forward it to the OIG/OSO for processing.

Currently, SBA conducts two types of background checks: (1) a Name Check, which requires a search of available records based on a person’s name and social security number (SSN); and (2) a Fingerprint Check, which searches available records based on the person’s name and SSN plus a complete and legibly written FD-258 Fingerprint Card.

These background checks can take from 6-8 weeks.

Aliens Form G-845

Aliens must provide their alien registration number on SBA Form 1919.

Lenders must obtain a copy of the individual’s USCIS documentation .

All lenders must register designated personnel with the SLPC at Sacramento504Register@sba.gov. Please send name of lender, lending institution, bank’s address and phone number to Sacramento504register@sba.gov

The SLPC will respond to such requests by providing instructions on how to complete registration and to use the electronic verification process.

As required by USCIS, SBA will release information about the status of an alien to lenders or other non-governmental entities ONLY when a signed and dated authorization from the alien is attached to and submitted with the 845 on that alien providing name, address and date of birth.

What documents do you need to send in?

FOR $350K and Under –Small SBALOANS

912 (criminal activity, if applicable)

845 Alien (green card, if applicable)

Form 4506-T is to be faxed in to IRS, response and original form to be retained in file.

Please submit information in ETRAN, upload completed forms using “Documents Upload” feature the 1919, 1920 forms, credit memo, and

all other related information, hit submit button.

What documents do you need to send in?

FOR $350K and Over LOANS

As of 3/1/14 lenders are required to submit applications to the LGPC using the

10-Tab format for all loan guaranty requests

The 7(a) Authorization After SBA approves the loan guaranty, an

Authorization will be issued for the loan using the required language in the National 7(a) Authorization Boilerplate.

The Authorization is not a loan agreement. It is a contract between the Lender and SBA, who each sign the Authorization, indicating specific conditions which must be met for SBA to provide a guaranty on a loan made by the Lender to a Borrower.

The requirements of the Authorization are directed to the Lender not the Borrower, and the Borrower does not sign the authorization.

When a loan is approved, a loan authorization must be generated

The Authorization spells out the terms of the loan, including the amount, interest rate, any other terms and

conditions including collateral requirements, etc., and SBA’s guaranty.

Authorizations do not need to be sent or faxed in Please retain in your file.

After the Loan is made

The lender must obtain all required collateral and must meet all other required conditions

before loan disbursement, including obtaining valid and enforceable security interests in any

loan collateral.

These conditions include requirements identified in the loan write-up, such as standby agreements, appraisals, business licenses, and cash/equity injections. In addition, for SLA loans

over $250,000 that are collateralized by commercial real estate, the lender must comply with the appraisal policy set forth in Chapter 4.

Loan Modifications

Teri Hendrix 916.735.19617aloanmod@sba.gov

Include Business name, loan number, lender phone/fax number

Within 10 days from approval

ALL MODIFICATIONS DONE IN CA

PRIOR TO FINAL DISBURSEMENT

After the Loan is made

Closing, Servicing and Liquidation The SBA Express lender must close, service, and liquidate its SBA Express loans using the same reasonable and prudent practices and procedures that the lender uses for its non-SBA guaranteed commercial loans.

 

1502 Reporting Mandatory on all 7a loans with an

outstanding SBA guaranty, regardless of payment activity.

Promptly notify SBA of cancelled or withdrawn loans.

Reporting period includes the first calendar day through the last calendar day of the prior month.

Colson Customer Servicewww.colsonservices.comTelephone: 1-877-245-6159e-mail: info@colsonservices.com

Loan Servicing Standards

As set forth at 13 CFR 120.535, lenders must service their loans based upon the following standards:

Service using prudent lending standards. Lenders must service 7(a) loans in their portfolio no less diligently than their non-SBA portfolio, and in a commercially reasonable manner, consistent with prudent lending standards and in accordance with Loan

Program Requirements. Those lenders that do not maintain a non-SBA loan portfolio must adhere to the same prudent lending standards for loan servicing followed by commercial lenders on loans without a government guarantee.

Unilateral Servicing Authority

For all loan servicing actions not requiring SBA’s prior written consent,

lenders must document the justifications for their decisions and retain these and supporting documents in their file for future SBA review to determine if the

actions taken by the lender were prudent, commercially reasonable and

complied with all Loan Program Requirements.

Unilateral Actions

Each month, the commercial loan service center receives hundreds of loan servicing actions which can be processed under the

lenders’ delegated, unilateral servicing authority. Many common unilateral

servicing actions do not require any sort of submission to SBA.

7a Lender Matrix

• Always check website for recent version.• Use 2237 available at http://

www.sba.gov/lender-documentation-tool?type=form&kw=Fresno&kw2=Fresno

• Notification only.– Unilateral actions – No response back to the lender. – E-Tran changes – No additional notification required to the

Center. – Loans sold on the secondary market – Please be specific.

Center will respond back to lender. Some actions will require investor approval before SBA can take action.

• What is a preference?– Subordinations – Collateral releases

Servicing & Liquidation Actions 7(a) Lender Matrix (continued)

E-TRAN Ultimate goal is to enable lenders to handle ALL unilateral

servicing actions (address changes, name changes, etc.) via E-TRAN.

E-TRAN lenders have the ability to view the status of their loans post-origination (maturity date, loan payments, etc).

Guaranty Fee calculator built into E-TRAN servicing module. Instant turn around on loan servicing actions.

Competitive Advantage: Ability to respond in the market place and approve loan changes in an expedited manner.

Overall programming is very “user friendly” and easy to learn.

Instant validation provides comfort that there are no errors in data entry.

E-TRAN (continued)

E-Tran enables lenders to make the loan servicingchanges without any sort of paper submission to

the SBA.

• Cancel undisbursed loans.• Terminate guaranty on disbursed loans.• Decrease undisbursed loans.• Change the use of proceeds, which does not

involve an increase to loan.• Changes to maturity date or months on loans

which have not matured.• Change loans from revolver to term or vice versa.• Change legal/trade name or address.• Change project from rural to urban or vice versa. • Change principal(s) gender, race, veteran status,

citizenship.

Extension of Maturity Date Subject to the general requirements in Paragraph A, the maturity date of a Note may be extended for up to 10 years beyond its original maturity date if:

a. The extension is requested before the SBA loan guaranty expires, i.e., less than 180 calendar days after the original maturity date and b. The extension will aid in the orderly repayment of the loan

See page 50 of SOP 5057

Maximum Maturities

Prior Consent Should Include:

– Statement of the proposed action.– What makes the request necessary/impact on

the SBC.– Loan status.– Financial statement analysis.– Loan collateral analysis (“before” the

modification and “after” the modification).– Lender must obtain the consent of all loan

obligors/guarantors.

Note: Typically, the lenders’ internal credit memorandum will suffice.

Send to:

Lrsc.servicing@sba.gov

102

SBA Working Capital and Contract Caplines

Program Overview

CAPLines Program Structural Changes Reduce 5 subprograms to 4:

Working Capital CAPLines (formerly Standard Asset Based CAPLines and Eliminated Small Asset Based CAPLines, maximum line amount $200,000.)

Contract CAPLines Seasonal CAPLines Builder’s CAPLines

Delegated processing for PLP Lenders

103

Key Features Working Capital CAPLine

Maximum line amount $5,000,000 Maximum guaranty percentage 75% (over

$150,000)/85% if $150,000 or less Maximum maturity increased from 5 to 10

years (except Builder’s CAPLine, which is limited by regulation to 5 years), this matches the maturity for Working Capital term loans

104

Eligibility• The applicant must qualify under Standard 7(a) requirements.• The applicant must sell on credit and create accounts receivable

Use of Proceeds• Finance short term working capital/operating needs.• May refinance existing short-term revolving debt.

Must NOT be used to• Pay delinquent withholding taxes or similar trust funds (state

sales taxes, etc.), or for floor planning.• To acquire fixed assets.

If lender discovers the line was used to finance a fixed asset; it must refinance that portion of the line into an appropriate term facility no later than 90 days after the discovery.

General Requirements

The cash cycle is the number of days a business takes from the time it acquires inventory, provides a service, manufactures a product etc., until it collects the cash from its sale of that inventory, service, or product. To measure the length of the applicant cash cycle – compute turnover ratios and convert into days.

Determining Cash Cycle Days

Receivable Turnover (ARTO) days

+

Inventory Turnover (ITO) days

-

Payable Turnover (APTO) days

=

Cash Cycle days

To determine the maximum loan amount, the lender must follow its established policies and procedures utilized on its similarly sized, non-SBA guaranteed Commercial Lines of Credit.* The key is the correct calculation of the business cash cycle.

ORThe lender may use the following formula:

Determining Loan Amount

Example

a.) Net Sales for prior year $1,000,000.00 Per year

b.) Divide prior year net sales by 365 $2,700.00 Per day

c.)Multiply daily sales figure by number of days to finance (whatever number is the business cash cycle)

30 Days

d.)The result will be the estimated working capital needs

$81,000.00Estimated

Need

Why is it important to calculate CASH CYCLE DAYS? Cash Cycle Days are included in the Loan Authorization.

Used to determine date for final disbursement.

Non-delegated processing will use cash cycle days as part of their review process to determine if the loan amount requested is reasonable.

Maximum line amount tied to the borrower’s cash cycle.

Principal payments tied to the borrower’s cash cycle.

Determining Cash Cycle Days

If the lender is Using a borrowing base certificate (BBC)• Lender must obtain a first lien on the applicant’s working

/trading assets (i.e., A/R, INV).

If the lender is Not using a borrowing base certificate (BBC)• Lender must obtain a first lien position on the working/trading

assets financed with the line.• If the working/trading assets are insufficient to provide a 1:1

collateral ratio, the lender also must take additional collateral to ensure there is a 1:1 collateral ratio.

• If business assets do not fully secure the loan, the lender must take available personal assets of the principals as collateral to ensure there is a 1:1 collateral ratio.

Collateral Requirements

Determining collateral value: • A maximum of 80% Advance Rate is allowed on eligible

A/R.

• A maximum of 50% Advance Rate is allowed on eligible

Inventory.• Machinery and Equipment is allowed at 50% of Net Book

Value (NBV) or 80% of Orderly Liquidation Value minus any prior liens.

• Real estate is allowed at 85% of the value.• An independent appraisal by a qualified individual must be

obtained by lender to value fixed assets greater than their NBV.

• After initial disbursement, lenders have unilateral authority to increase or decrease the advance rate for receivables and/or inventory by 5% above or below rate stated in Authorization.

Collateral Requirements

Examples of an ineligible receivable:1) Any invoice more than 90 days past due. (exceptions are

permitted with SBA’s prior written concurrence)

2) A customer who is delinquent on more than 50% of its total outstanding invoices. ALL accounts from that customer are ineligible.

3) All re-billed accounts - the practice of issuing a credit to a customer and re-invoicing the obligations in the current billing cycle.

4) Foreign receivables not backed by documentation such as standby letters of credit, credit insurance, etc.

5) Contra accounts such as an offsetting receivable and payable between the borrower and one of its creditors.

6) Accounts due from affiliate companies.

7) Accounts that require subordination to other parties—such as Government contracts that require an assignment of the projects receivables.

Collateral Requirements

Principal & Interest Payment Requirements

There is no provision for Interest only payments.• Interest must be paid at least monthly• Interest only payments for any period exceeding the borrower’s cash cycle, seasonal cycle, contract final payment date or project completion date are not permitted.

Principal payments are tied to the borrower’s cash cycle.

Level of Funds Control & Monitoring

The level of funds control for a Working Capital CAPLine, whether a BBC is used or not, is determined by the banking relationship the lender has with the borrower.

• If the lender has the borrower’s deposit accounts, the lender is not required to utilize cash collateral accounts or other types of controlled accounts, but must follow its established procedures for its similarly-sized, non-SBA guaranteed commercial lines of credit to monitor payments received.

• If the lender does not have the borrower’s deposit accounts, then the lender must utilize some form of controlled account as follows: The customer of the borrower can be instructed to send their

remittances via joint payee checks payable to lender and borrower, to the lender; or

Lock box (bank account under lender control where borrower’s customers remit payments for accounts receivable).

When a BBC is used - the minimum monitoring requirements are:

• Monthly – BBC; Aging of A/R & A/P; and INV (if advanced against).

• Quarterly – Borrower prepared financial statements

• Annually – For $1,000,000 or less; credit review including a cash flow analysis, concentration analysis, collateral analysis, owner/guarantor credit review, and annual site visit.

• Annually – For more than $1,000,000; same as above plus Annual Field Examination.

Level of Funds Control & MonitoringUsing a BBC

When a BBC is not used - the minimum requirements are:

Use financial covenants consistent with those used on Lender’s similarly sized, non-SBA guaranteed commercial lines of credit – Tested Quarterly, Semi-Annually or Annually.

Annually: • At a minimum; conduct a credit review including a cash flow analysis,

collateral analysis to ensure there is a 1:1 collateral ratio, owner/guarantor credit review, and annual site visit.

• For $1,000,000 or less; obtain borrower prepared financial statements and tax returns.

• For more than $1,000,000; obtain compiled, reviewed or audited financial statements and tax returns.

Level of Funds ControlNot Using a BBC – 1:1 collateral

Annual Field Examination - for loans more than $1,000,000

• Must be conducted by the lender’s staff or a 3rd party.

• Complete a physical verification of the assets which compose the BBC, including a sampling of the assets.

• At a minimum, an examination must be conducted prior to the initial disbursement and annually thereafter.

• The lender should describe the level and frequency of examinations in the credit memorandum based on the quality of the records, risk profile of the borrower, and seasonality of the line.

Level of Funds Control & Monitoring

Application Process

For PLP and non-Delegated loans- use SBA Forms 1919 and 1920SX Parts B&C. The lender should also use their own documents including the Credit Memorandum. E-Tran submission for SBA approval is required.

Include comment if lender will use BBC or 1:1 collateral ratio.

Include comment on use of deposit account or controlled account.

Include cash cycle days used to determine short term working capital need.

Contract CAPLines Program—Use of Proceeds Proceeds can be used to finance all costs (excluding profit), previously only

labor and materials. Contract CAPLine proceeds may not be used for:

permanent working capital, to acquire fixed assets, to pay delinquent taxes or similar funds held in trust (directly or

indirectly), to finance a contract in which significant performance has already begun, for change of ownership Floor plan financing; to cover any mark-up or profit; to finance the performance of another contract or sub-contract; or in repayment of a different contract or sub-contract.

118

Contract CAPLines Program--Collateral Assignment of Contract Proceeds:

Subject to the exception noted below, prior to initial disbursement on any Contract CAPLine, the entity the borrower has entered into the contract with must be advised in writing by both the lender and borrower that an assignment of the contract proceeds is required. Such assignment must be in place before any disbursement for a particular contract is made and include a provision for the lender’s right to receive all payments from the third party. The lender must receive written acknowledgement from the third party. Exception to the Assignment of Contract Proceeds: An assignment of the contract proceeds may

be foregone, if at least two of the following conditions are met: The term of the contract being financed is 12 months or less; A successful track record between the borrower and the contracting authority exists relative to

the same or reasonably similar contracts. (The definition of a “successful track record” includes but is not limited to, any prior contractual arrangement between the subject parties, where the responsibilities of each party under the contract were met to the satisfaction of all parties to the contract.);

Financial analysis of historical income statements and/or tax returns and pro-forma financial statements show that the applicant has a Debt Service Coverage ratio that exceeds 1:1;

All contract proceeds are paid directly to the lender by the contracting authority or, in the instance where a performance bond is in place, a Funds Control (or escrow or third party servicer) procedure is implemented; or

There is other available and worthwhile collateral pledged to secure the line by either the borrower or any owner/guarantor.

119

Contract CAPLines Program—Eligible Contracts and Purchase Orders

A contract between a prime and subcontractor, a contract with Performance bonds, and a purchase order is eligible for financing under Contract CAPlines provided the lender satisfies the section 2 (a) on page 218 of the SOP 50 10 5(F) and satisfies the following:

Prime and Subcontractor Contracts: a contract between a Prime and Subcontractor is eligible to be financed with a Contract CAPLine, if at least two of the following conditions are met: Both the Prime and the Subcontractor have favorable credit ratings based on an acceptable

rating agency (e.g., Builders Industry Credit Association “BICA”); There is a successful track record between the Prime contractor and the Subcontractor

(borrower); There is a successful track record between the Prime contractor and the contracting authority; The Contract CAPLine amount is less than $300,000; The term of the contract is 12 months or less; The financial analysis of historical income statements and/or tax returns and pro-forma

financial statements show that the applicant has a Debt Service Coverage ratio that exceeds 1:1; or

There is other available and worthwhile collateral pledged by either the borrower or any owner/guarantor.

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Contract CAPLines Program—Eligible Contracts and Purchase Orders

Contracts with Performance Bonds: a contract requiring a Surety’s performance bond may be eligible for a Contract CAPLine provided the lender perfects a UCC security interest in the contract proceeds. SBA recognizes the following conditions may be necessary to effectuate the

transaction where a contract requires a Surety’s performance bond: The lender’s perfected UCC security interest in the contract proceeds will

be subordinate to the cost reimbursement claim of the Surety; and The Surety may require that a funds control facility be executed. The funds

control facility would disburse directly to suppliers and laborers. The contracting authority will remit contract proceeds directly to the funds control facility, which will remit payment to the lender.

Purchase Orders under a Master Agreement: Purchase Orders (PO) may be substituted for a formal contract, provided the following conditions exist: The PO is issued to the borrower under a Master Agreement; and The combination of the PO and the Master Agreement constitute a binding

agreement.

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Thank You!

Q & A Anne.Hunt@sba.gov 617- 565- 5577 Gregory.Gould@sba.gov 401-528 -4561 Darrell.Dante@sba.gov 617 -565 -5169