BDC Capital: Innovative Financing Solutions CDC New England: SBA 504 Update How Bankers Can Mitigate Risk and Get Deals Done! Thursday, February 24, 2011 New Haven, CT Seminar Presenters BDC Capital / CDC New England Carol Brennan x204 Director of Business Development Connie Karsh x205 (203)200-7055 cell Business Development Officer Carol Muradian x207 Senior Administrative Officer 20 Church St., Hartford, CT 06103 Tel 860-218-2912 About Us BDC Capital www.bdcnewengland.com A private company Funded by 28 banks (can work with any lender) More than $1 billion in financing To more than 5,000 companies Over the past 57 years CDC New England www.cdcnewengland.com An affiliate company Acts as an agent for SBA in providing SBA 504 Loans For fixed asset financing: real estate and machinery & equipment 90% financing with low, 20-year fixed rates BDC / CDC Loan and Investment Solutions BDC Fully-followed Lines of Credit $500,0000 - $3,000,000 BDC Term Loans: $500,000 - $3,000,000 BDC Mezzanine Investments: $750,000 - $5 million CDC New England SBA 504 Loans: typically $250,000 project size and up We work with your bank to provide the complete financing that a business needs to grow. BDC Secured, Revolving, Asset Based (ABL), Lines of Credit • Secured by a company’s collateral, primarily receivables and inventory • Loan revolves daily, increasing by each advance and decreasing via cash receipts • Cash is controlled via a lockbox and collateral account at a bank (not BDC) • Loans are formula driven: an example of advance rates might be: 80% of eligible receivables, and 35% of eligible inventory $500K to $3MM or larger with a participation BDC Lines of Credit – Typical Candidates • Manufacturers, Distributors, Wholesalers, some Service companies with: •With temporary earnings issues or balance sheet leverage •Solid management team •Good financial controls, with financials prepared by a reputable accounting firm •NOT construction companies with progress billings •NOT companies with inventory financing needs greater than A/R financing Benefits of a Revolving Line of Credit – for the borrower Ability to: • Have cash immediately available for use • Finance growth – can borrow on new sales based upon the formula advance rate. • Borrow efficiently - only pay interest on daily outstanding loan balance. • Take vendor discounts, thereby increasing profitability. • Maintain relationship with their existing bank for treasury (cash) management. Benefits of a Revolving Line of Credit – for the banker In some cases, we may participate a loan with the existing/prospective lender, allowing the lender to: • stay in a relationship / gain a customer • provide cash management services • lessen the bank’s exposure • add more oversight to their loan. Advantages of a Revolving Line of Credit vs. a Typical Bank Line of Credit (LOC) • Revolves daily rather than through a monthly borrowing base (faster access to cash) • The focus is geared to collateral quality and not financial ratios. • Generally will accept a higher degree of leverage than a typical LOC. • The additional monitoring of A/R can provide comfort when dealing with other issues. • No annual “30 day pay-down” feature. • Substantially less costly than a finance co. or factor. •Interest rate = LIBOR (26bps) plus 6 – 7% BDC Term Loans • Term loans: $500,000 to $3,000,000 • With or without an SBA 7(a) guarantee (BDC Capital is an SBA preferred lender) • In a senior or junior secured position or in a participation loan with a lender • Rates as low as 5.5% - floating • Meant to supplement bank financing BDC Term Loans Example of Borrower Needs: •Additional working capital needs: BDC to refinance portion of line of credit into 7(a) term loan – took 2nd position on assets •Refinance existing term debt to free up cash flow for real estate acquisition •Business acquisition – participation loan with bank and SBA 7(a) guarantee BDC Mezzanine Investments BDC’s 3nd Mezzanine Fund – Raised $28 million • For acquisitions, leveraged buyouts, management buyouts • For healthy, growing companies looking for “growth capital” - equity base too thin Companies with: • Solid management • Strong cash flows (usually limited collateral) • Barriers to entry BDC Mezzanine Investments • Investment size: $750,000 to $5,000,000 • A market rate of interest (12%); 5 year term • Plus either : - a royalty fee tied to sales (tax deductible) - or a warrant • Don't give up ownership / control • Don’t require personal guarantees • Less dilutive than equity • Can fill the “collateral gap” The SBA 504 Advantage • Ask Your Borrower the Following Question When Acquiring Real Estate and Machinery & Equipment: – Is working capital important to your business success? – Is a long term fixed rate important? – Do you want to protect yourself in the event of a devaluation of real estate? SBA 504 Loan Overview • The borrower obtains up to 90% financing with a low fixed rate on the SBA portion. • The bank provides a conventional loan in a first mortgage position with a 50% loan-to-value ratio; SBA provides a second 40% piece • New England Certified Development Corporation (a “CDC”) takes care of all of the SBA paperwork. • “New money” expansion – with limited refinancing permitted as part of an expansion project. • Refinancing allowed – with certain restrictions • Can also be for used machinery & equipment SBA 504 Eligible Uses • Acquisition or new construction or improvement of owner-occupied real estate – 51% occupancy for existing building – 60% occupancy for new construction • Machinery & Equipment – i.e., fixed assets with a useful life of 10 or more years SBA 504 Case Study • Purchase Price of Real Estate $500,000 • Build out / renovations $150,000 • Purchase fork lift $ 50,000 TOTAL: $700,000 Project Cost • Bank: $350,000 (50%) • CDC: $280,000 (40%) • Borrower: $70,000 (10%) SBA 504 Loans – Interest Rates • Bank sets pricing on 50% first mortgage • Minimum 10 year term for 20 year project; • Minimum 7 year term for 10 year project • SBA funds 40% share (through CDC New England) • Interest Rates: -low, 20-year fixed rate for real estate: -low, 10-year fixed rate for M&E Call us for most recent rate. SBA 504 - Benefits for the Borrower • Low down payment – 90% financing •Conserves working capital for other needs associated with the expansion • Fixed interest rate on SBA portion • Substantial interest savings • Opportunity to blend short and long-term interest rates SBA 504 - Benefits For Lenders • Set yourself apart by presenting a 504 option – Differentiation is important in a crowded marketplace • Mitigate Collateral Risk • Borrowers will be in a stronger cash position • A way to manage overall lending limits and industry exposure • Secondary market available for first mortgage – call us for more details! SBA 504 Eligible Businesses • Must be operated for profit • Program does not finance speculative real estate ventures • Self-storage units are now eligible • Business must be “small”: – Net worth under $15 million and – No more than $5 million average profit for last 2 years SBA 504 Dollar Limitations • Maximum Debenture Size – $5 million • Total Project Size: $12.5 million or higher – $5.5 million if manufacturer or certain energy goal objectives • Total Project Size: $13.75 million or higher CDC New England does almost everything (SBA forms, etc.) • Easy for Bank and Borrower - bring us in early • We can underwrite and get approval while the bank is still working on the bank credit memo • Not much to cut regarding rate and fees – but we will not be undercut • Our closing team is very easy to work with! • Only PREMIER CDC in New England • Can do bridge and down payment financing through BDC SBA 504 Debt Refinancing with expansion • Project must involve 504 eligible expansion • Can add up to 50% of “expansion” amount from existing indebtedness • Debt refinanced will be added to the expansion cost to establish the total project costs • Original Proceeds of loan must have been used for fixed asset acquisition • Fixed assets collateralizing existing debt must also collateralize 504 loan SBA 504 Debt Refinancing – no expansion • Benefits borrowers facing imminent real estate loan maturity or balloon payments • A business does not have to expand to qualify • Can refinance up to 90% of the current appraised property value or 100% of the outstanding mortgage, whichever is lower. • A borrower must meet several criteria: Imminent Maturity Date: On or before December 31, 2012 Duration of Outstanding Debt: At least two years Duration of Business: At least two years Current Status on All Debt: No payment deferrals No past dues of more than 30 days in the past 12 months • SBA will accept refinancing applications – on February 28, 2011 – through September 30, 2012 SBA 504 Debt Refinancing – no expansion Loan Structure • First Mortgage - not less than 50% • SBA 504 Loan - not more than 40% • Borrower's Equity - not less than 10% (may be satisfied by the project property or other fixed assets acceptable to SBA as collateral) – No extra down payment for special use properties • Substantially all (85%) or more of the proceeds of the loan being refinanced must have been used for SBA 504 real estate eligible purposes SBA 504 Debt Refinancing – no expansion • No refinance of loans which are currently part of an existing SBA 504 Project or are subject to an existing federal guaranty. • Ongoing fee of 1.043% versus 0.749% - increase of 0.294% – Added into effective rate • If amount of refinance is not sufficient to repay debt, lender may – (i) forgive the balance – (ii) accept payment from the borrower for all or a portion of the deficiency, or – (iii) accept a new note which will be • subordinate to the liens securing the refinance and • a three-year standby requirement (this is negotiable) Thank you for attending! 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