SEED Lender Training May 3, 2013 www.sba.gov/ma FY 2012 SBA Approvals US • 53,848 Guaranteed Loans = $21,865 billion 44,377 (7a) 9,471 (504s) Massachusetts • 1846 Total Loans • 1,535 (7a) = $199 million In participation with 121 7(a) lenders • 311 (504s) = $209.6 million In participation with 8 CDCs • 87 micro loans in Participation with 8 microlenders LOAN DOLLARS BY FISCAL YEAR Massachusetts District Loan Volume FY 2002-2012 7(a) Loans Loan Approvals by Fiscal Year MA LOAN APPROVALS BY FISCAL YEAR FY 2002-2012 4000 3370 3500 3000 2892 3000 2500 3310 2457 2408 2223 2205 2000 1735 1846 1637 1500 1000 500 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 As of 4/19/13 – MA is one of the most productive SBA offices in the US by loan approvals! # 504s - #5 # 7a’s - # 3 MICHIGAN DISTRICT OFFICE 993 LOS ANGELES DISTRICT OFFICE 297 LOS ANGELES DISTRICT OFFICE 981 ILLINOIS DISTRICT OFFICE 207 MASSACHUSETTS DISTRICT OFFICE 871 SOUTH FLORIDA DISTRICT OFFICE 198 SANTA ANA DISTRICT OFFICE 176 MASSACHUSETTS DISTRICT OFFICE 159 SLA # 2 WISCONSIN DISTRICT OFFICE MASSACHUSETTS DISTRICT OFFICE 101 96 And on Loans less than $150,000, the MA SBA is #1 out of SBA’s 68 District Offices!! Focus for 2013 Small Loan Advantage & Working Capital Lines/Contract Lines – SBA lender focus groups to design programs that closely resemble what lenders do conventionally; – “Express-like” with applications and servicing – Streamlined – reduce lender’s transaction costs – SLA 2.0 NOW Available to ALL lenders for loans of $350,000 or less – WC Caplines/Contract Lines can be processed with delegated authority(PLP) through Etran Why did SBA Create SLA? • Across the US, low $ loans (under $150,000) can be difficult to obtain; • Adversely impacting underserved markets; • While 7(a) dollar numbers are up, loan numbers are down; • Lenders Responded (Focus Groups) – Simplify origination procedures – Reduce SBA loans’ overhead cost Credit Scores Will Predict Risk More Accurately and Simply Than Complex Underwriting Small Business Credit Scores Accurately Predict Purchase 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. This Score Suite is an IndustryStandard Decisioning Tool 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. Source: Dun & Bradstreet, Fair Isaac Corp. Purchase Rates by SBPS Score Band 37% 29% 26% 22% 17% Below 140: 21% 12% 7% Above 140: 3.7% 5% 3% 2% 2% 1% 1% 1% 0% Source: SBA Loan/Lender Monitoring System. Sample Users of Small Business Credit Scores 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 “You are five times less likely to have a repair and denial using SLA 2.0 versus standard 7(a).” (including Small Rural Lender Advantage, PLP, Non-plp etc.) – Repair and denial rate for standard 7(a) is 6.2% versus 1.3% for SBA Express. SLA 2.0 borrows the express secret sauce: “consistent with your bank’s policies and procedures for similarly sized non-sba commercial loans” “When your borrower receives a credit score above 140, SBA is sharing in decisioning the credit worthiness of that borrower.” – When the same loan is submitted to Little Rock or Fresno at purchase as an early default or otherwise, a SLA 2.0 loan that scored above 140 at origination has the benefit of the SBA having shared in decisioning creditworthiness. – Lenders without small business credit scoring models can benefit from the SBA’s Liquid Credit Scorecard that is built upon over 300,000 outstanding SBA loans. A world class risk management tool. • “It is in your economic self-interest to send all term loans below $350,000 through SLA 2.0 because it will put the agency on a path to lowering the 55 basis points you pay annually on your outstanding loans.” – Currently, the subsidy model is weighted heavily on forecasted gdp growth and forecasted unemployment rate. By allowing the agency to score your borrowers, SBA will be able to give forecasted portfolio performance more significance which will lower your subsidy rate. This means larger margins for SBA lending. Greater profitability. President’s 2014 budget (proposed) • Waive SBA fees on loans of $150,000 or less; • 504 refi authority • SBA One www.sba.gov/ma Why Do Lenders Use the SBA Guaranty? • Longer maturities are needed • Collateral may be inadequate to meet normal underwriting • Start-up or certain types of businesses • Business leverage • Lender’s legal or policy limit • Minimize risk 7a Guaranteed Loan Made by private lenders, with SBA guarantee – SBA helps the bank get to the YES decision with credit enhancement. Maximum loan size $5 million 85% guaranty on loans below $150,000. 75% guaranty on loans above $150,000. The 7(a) Loan Guarantee Program 7 (a) Loan Program Details • SBA’s Primary Business Loan Program • Broad eligibility requirements • Wide range financing options 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 • Maximum loan amount increased from $2 million to $5 million • Prime + 2.75% for loans over 7 years • 85% guarantee on loans up to $150,000 • Rates can be higher for smaller loans • 75% on loans > $150,000 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 Financing –What does SBA look for? • • • • Owners and operators w/ good credit & character Feasible business plan Management expertise and commitment necessary for success Sufficient funds, including SBA guaranteed loan, to operate the business on a sound financial basis • Adequate 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. 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 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, and spouses http://www.sba.gov/idc/groups/public/documents/sba _program_office/bank_sba413.pdf www.sba.gov/ma Liquid Resource Test • Total Financing Package (TFP) – includes SBA loan(s), equity injection, and any other financing • Applies to each 20% owner AND SPOUSE www.sba.gov/ma 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 – Closely held non-marketable stocks www.sba.gov/ma – Equity in real estate Total Financing Package (TFP) • When TFP is – <$250,000 • 2 x TFP or $100,000, whichever is greater – >$250,001 < $500,000 • 1 ½ x TFP or $500,000, whichever is greater – >$500,000 • 1 x TFP or $750,000, whichever is greater www.sba.gov/ma 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 SBA Express Program • 79% of SBA guaranteed loans in Massachusetts are being made under Express • Uses lender’s forms, processes & procedures – not the SBA’s, expediting loan approval and process • Term Loans or revolving lines of credit up to $350,000. • SBA guaranty of 50% 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 benefits continued • Lender can charge 6.5% over prime for loans of $50,000. or less • Lender can charge 4.5% over prime for loans over $50,000. Debt Refinancing • When refinancing debt the new installment amount must be at least 10 percent less than the existing installment amount(s). If the note terms include an escalating payment structure, the new installment amount must be at least 10 percent less than the expected installment amount within the next 12 months. Debt Refinancing Criteria • Requires “substantial benefit” to applicant • SBA requires copies of all notes that will be refinanced • Demand, interest only, balloon notes will automatically meet substantial benefit test Debt Refinancing • When refinancing debt, the lender’s loan file must include a written analysis that addresses the following issues and any supporting documentation: • Why was the debt incurred? • Has over-obligated or imprudent borrowing necessitated a major restructuring of the debt? • Is the debt being refinanced currently on reasonable terms? • Will the new loan improve the financial condition of the Small Business Applicant? • Does the refinancing include payments to creditors in a position to sustain a loss, for example, the applicant has an inadequate collateral position, low or deficit net worth, or the loan is in default? • Would the lender/SBA be likely to sustain part or all of the same loss by refinancing the debt or will additional collateral or altered terms protect the interest of the taxpayer? • What portion of the total loan does the refinancing constitute? • If credit card debt will be refinanced, the borrower must certify that the credit card debt being refinanced was incurred exclusively for business purposes. Debt Refinancing • If the credit card is issued to the small business, the lender may refinance the credit card debt: After confirming that the credit card is in the name of the business The borrower has certified that the credit card debt being refinanced was incurred exclusively for business related purposes. Loan proceeds must not be used to refinance any personal expenses. Debt Refinancing • If the credit card is issued to an individual personally – The lender must confirm which of the credit card obligations were used for business-related purposes – Lenders must document business purpose of the credit card debt and the borrower must certify that the loan proceeds are being used only for business-related debt – Documentation required for refinancing credit card debt includes a copy of the credit card statements and individual receipts for any business expenses in excess of $100 – In all cases, the borrower must certify that the amount that will be refinanced was used exclusively for business expenses. Debt Refinancing • Refinancing Same Institution Debt: – When a lender seeks to use SBA guaranteed loan proceeds to refinance its own debt, it must: Include a transcript showing the due dates and when payments were received as part of its analysis and recommendation. The lender must explain any late payments and late charges that have occurred during the last 36 months. Debt Refinancing Refinancing an SBA-Guaranteed Loan: • Refinancing an existing SBA debt is permissible provided the conditions of debt refinancing eligibility are satisfied and the following procedures are followed: • Contact the lender holding the existing SBA-guaranteed loan and verify that the lender has declined to approve an increase in loan amount or a second loan and the lender is either unwilling or unable to modify the current payment schedule. • Document the conversation in the case file, recording the date, time and person with whom you spoke, along with a short summary of the conversation. TRANSFER OF PARTICIPATION AGREEMENT SBA Loan No. Borrower: WHEREAS, on the day of a certain Promissory Note in the original amount of $ was executed by hereinafter called “Borrower,” and delivered to , hereinafter called “Transferor,” and , WHEREAS, the repayment of the loan was partially guaranteed by the United States Small Business Administration (SBA) under the provisions of a Loan Guaranty Agreement, SBA Form 750, made by and between Transferor and the SBA, and the Authorization for Guaranty dated , and WHEREAS, the Transferor desires to sell, transfer and assign its participation in the loan to “Transferee”, and , hereinafter called WHEREAS, the Transferor has notified the borrower of the details of this transfer, and WHEREAS, Transferee has made and entered into a Loan Guaranty Agreement, SBA Form 750. NOW THEREFORE, in consideration of the consent and agreement of the SBA to the Transfer of Participation, the Transferee hereby agrees to purchase the entire interest of the Transferor in the loan and agrees to assume all the obligations of the Transferor under the Loan Guaranty Agreement and Guaranty Authorization, copies of which are attached as Exhibits “A.” The further agrees to obligate itself and be and remain liable for any and all deficiencies which may have resulted in Transferor’s closing or servicing of this loan. www.sba.gov/ma IN WITNESS WHEREOF, this Agreement is executed by the undersigned parties as of the day of , 20 . Transferor: Transferee: Lender Name: By: Address: FIRS No. Telephone Number: Facsimile Number: Lender Name: By: Address: FIRS No. Telephone Number: Facsimile Number: UNITED STATES SMALL BUSINESS ADMINISTRATION Its: By: NOTE TO TRANSFEROR: Please indicate on Form 1502 that Loan has been Transferred. Use Code 7 NOT code 6. DO NOT report as “Paid in Full” Commercial Loan Service Center - Fresno 2719 North Air Fresno Drive, Suite 107 Fresno, California 93727-1547 (559) 487-5790 Commercial Loan Service Center - Little Rock 2120 Riverfront Drive, Suite 100 Little Rock, AR 72202-1794 (501) 324-5871 www.sba.gov/ma . Additional Template Instructions This form must be accompanied with a statement addressing the following elements. See SOP 50-50-4, Chapter 5, Paragraph 27 for additional details. Did the borrower request the transfer, and will it benefit the borrower? What is the purpose of the transfer? When transferring a loan, the lender must notify the borrower of the details of the transfer. Does the lender acquiring the SBA guaranteed loans have an executed SBA Form 750, “Loan Guaranty Agreement?” (Also, identify the type of lender, e.g., CLP, PLP, LowDoc, etc.) Is the transfer in compliance with paragraph 26, “Assignment of Interest in a Loan/Transfer of Loan(s)? For transfer of a loan sold in the secondary market, both the buying and the selling lenders must provide written notification to the fiscal transfer agent (FTA) of the transfer of SBA’s approval www.sba.gov/ma Debt Refinancing • Procedure to refinance a same institution SBA-guaranteed loan: – A lender may refinance one of its own SBAguaranteed loans only if it is unable to modify the terms of the existing loan because a secondary market investor will not agree to modified terms. – These applications may not be processed PLP, they must be processed in the LGPC. Debt Refinancing • Refinancing under SBA Express: – 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); and • The new loan meets the SBA’s 10% increase in cash flow requirement • Can refinance own debt as long as lender’s exposure will not be reduced. 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 SBA Collateral Policies • Personal guaranties from principals owning 20% or more of business • Liens on personal assets may be required • Loans are not declined for insufficient collateral SBA 7A Collateral Policies • SBA loans must be secured as fully as possible with whatever worthwhile assets available • A loan is fully secured if SBA has security interests in assets with a combined “liquidation value” up to the loan amount. Valuation of collateral Generally, you calculate the net realized value of collateral by applying the following liquidation percentages to the fair market value • • • • • Real Property: Commercial RE 75% Residential RE...................................................80% Unimproved Land..............................................50% Business Assets (net of Depreciation): Machinery/Equipment.......................................50% • Furniture/Fixtures..............................................10% • Accounts Receivable/Inventory.........................10% • Leasehold Improvements...................................05% A personal residence is taken as collateral when: • collateral offered is weak and the equity equals or exceeds 25% of the property’s fair market value; or • The participating lender requires it Eligibility-Change of Ownership: – A Small Business Applicant may use loan proceeds for a change of ownership in the following circumstances: • The Small Business Applicant is purchasing 100% of the ownership interest in a business (either an asset purchase or a stock purchase); • One or more existing owners are purchasing the stock of a selling owner or owners resulting in 100% ownership by the purchasing owners. • The seller is not remaining as an officer, director, stockholder or key employee of the business. (If a short transitional period is needed, the small business may contract with the seller as a consultant for a period not to exceed 12 months including any extensions.) Eligibility-Change of Ownership – The business must be the borrower. – If there is business real estate as part of the change of ownership, the real estate cannot be financed separately by a non-SBA guaranteed loan unless the SBA loan receives a shared lien position (pari passu) on the real estate with the non-SBA guaranteed loan. This provision does not apply if the business real estate is being financed as part of a 504 project. Eligibility-Change of Ownership • The following changes of ownership are not eligible: – A non-owner who is purchasing a portion of the ownership of the business from a selling owner; or – An existing owner who is purchasing the ownership of another existing owner that will not result in 100% ownership by the purchaser. Eligibility-Intangible Assets • Intangible Assets: An SBA-guaranteed loan may be used to finance a change of ownership that includes intangible assets (goodwill, client/customer lists, patents, copyrights, trademarks and agreements not to compete) • If the purchase price of the business includes intangible assets in excess of $500,000: Borrower and/or seller must provide an equity injection of at least 25% of the purchase price of the business for the application to be processed under delegated authority. (Seller equity is defined as seller take-back financing that is on full standby (principal and interest) for a minimum of 2 years.) The borrower and seller will agree how much equity each will provide. Eligibility-Intangible Assets-Cont. • If the purchase price of the business includes intangible assets of $500,000 or less, 25% equity does not apply. • The purchase price of the business includes all assets being acquired such as real estate, machinery and equipment, and intangible assets. Real estate may not be removed from the transaction and financed separately to avoid the 25% equity injection requirement for PLP processing. Eligibility-Business Valuation • Determining the value of a business (not including real estate which is separately valued through an appraisal) is the key component to the analysis of any loan application for a change of ownership. • An accurate business valuation is required because the change in ownership will result in new debt unrelated to business operations and create an intangible asset. • A business valuation assists the buyer in making a determination that the seller’s asking price is supported by historic operations and permits the buyer to make a reasonable return on his or her investment. Eligibility-Business Valuation-Cont. • Any amount in excess of the business valuation may not be financed with the SBA guaranteed loan. • Lender Verification of Business Valuation Financial Data Lender must obtain a copy of the financial information relied upon by the individual who performed the business valuation and verify that information against the seller’s IRS transcripts to ensure the accuracy of the information. 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. BUSINESS 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” BUSINESS VALUATION A “qualified source” is an individual who regularly receives compensation for business valuations and is either: BUSINESS VALUATION (1) A licensed Certified Public Accountant (CPA) that performs the business valuation in accordance with the “Statement on Standards ” published by the American Institute of Certified Public Accountants (AICPA). BUSINESS VALUATION (2) Accredited by one of the following recognized organizations; (a) Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers; (b) Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers; (c) Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants; and BUSINESS VALUATION • (d) Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts • (e) Accredited Valuation Analyst (AVA) accredited through the National Association of Certified Valuation Analysts. Small Loan Advantage • Based on the successful Small/Rural Lender Advantage streamlined application process and “SLA 1.0” • NOW Available to ALL lenders for loans of $350,000 or less How will SLA Assist? • Streamline SBA loan origination process for small loans – Expand Express platform & make available to SBA all lenders – For loans of ≤ $350,000 – Replace complex SBA underwriting criteria with Liquid Small Business Credit Scores – Couple streamlined underwriting and collateral policies with the 7(a) full guarantee of 75% to 85% • 6/1/2012 incorporated SLA changes into SOP 50 10 5(E) • SBA Information Notice 5000-1240 has summary details Key Features of SLA • All SBA Lenders may participate • Loan maximum of $350,000 with 75% - 85% Guaranty • Modified credit analysis and collateral requirements Note: same SBA 7(a) eligibility policy, maximum loan maturities, standard program interest rate criteria, environmental policy • Revolving lines of credit are NOT eligible (USE EXPRESS for lines up to $350,000) • Requires SBA “credit score” pre-screening • All applications must be submitted through E-Tran • Use Express application Forms 1919 &1920 Parts B & C SLA Pre-Screen To pre-screen the application for a credit score, enter the following in ETRAN: Business Entity : Legal name, EIN number address, city, state, zip and phone, DUNNS number (if available) All Principals: Social Security number, name, address, city, state, zip and phone. be sure to click save and next, click on Credit Score up top, check off all parties and submit. If score is above 140, give applicant 4506-T, and 1919. Please advise applicant a personal financial form will be needed including household (spouse and children) assets and 3 years tax returns. 63 Credit Analysis • Perform a thorough and complete credit analysis to reasonably assure repayment (SEE COPY OF CREDIT MEMORANDUM) • Documentation must, at a minimum, include: – Factors for underwriting and credit decision consistent with similarly-sized non-SBA loans, including: • Cash flow analysis or projected cash flow analysis if applicant has been in business less than 2 years • Owner/Guarantor analysis – May use own credit scoring criteria – under specific conditions – Consider the length of time in business and the depth of management experience, including a brief description of management team Credit Analysis, cont. • Review strength of business including analysis of key characteristics such as: internal credit/deposit data, current consumer credit bureau data, etc. to determine ongoing creditworthiness • Verify accuracy of financial data using IRS Form 4506-T(Pre loan approval) • Demonstrate repayment ability from cash flow of the business by documenting the following: – Debt service coverage ratio exceeds 1:1 on a projected basis and – Loans >$50,000, global cash flow coverage ratio exceeds 1:1 on a projected basis. Lender must document the definition or formula used to calculate global cash flow Collateral Analysis & Policy Just like Express……. • SLA loans ≤ $25,000 collateral is not required • SLA loans over $25,000 to $350,000 – Follow same collateral policies and procedures for similarly-sized non-SBA guaranteed loans – At a minimum, must obtain lien on borrower’s business assets to secure SBA-guaranteed loan – Loans > $250,000 & collateralized by commercial real estate = must comply with appraisal requirements in SOP 50 10 5 (E) 66 Life Insurance Like Express, Lender may follow their internal policy for similarly sized non SBA guaranteed loans regarding life insurance. Please note: file must have reason as to why or why insurance was not required. 67 • Additionally, for those loans over $250,000, and collateralized by commercial real estate, the lender must comply with SBA appraisal requirement set forth in SOP 50 10 5 (E) Subpart B, Chapter 4, Paragraph II C. • Environmental Review Environmental review required of all commercial properties if a security interest will be taken to secure SLA loan - Follow SBA rules set forth in SOP 50 10 5 (E) SBA Application Documents www.sba.gov/for-lenders How to Apply Step 1: Pre-screen applicant in E-Tran & obtain credit score • Enter GLS, use “E-Tran Loan Origination” and select “Small Loan Advantage” process • Enter 14 data fields • E-Tran will generate a credit score • If Score is ≥ 140: • Proceed with E-Tran entry, “Validate” & “Submit” • OR exit system & re-enter at another time to fully process the loan Contents of SLA Application Required SBA Forms • 1919 Borrower Information Form • 1920SX - Part B Lender Application • 1920SX - Part C Eligibility Checklist • IRS Form 4506-T • Complete Credit Memorandum Potential Other Required Forms [see SOP 50 10 5(E)] • 912 Statement of Personal History • 159(7a) Loan Agent Fees • The SLA 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. www.sba.gov/ma • The minimum SLA 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 www.sba.gov/ma • If loan application does not receive an acceptable credit score, the lender may submit a “Standard 7A” thru the CA processing center, or may submit the request thru Express (with a 50% guaranty) www.sba.gov/ma SLA Credit Score Response 75 SLA Eligibility Screen 7(a) 76 • Lenders may use their own credit scoring criteria to assess the character, reputation and credit history of the applicant, including historical performance as well as the potential for long term success. www.sba.gov/ma • Business credit scoring models may be used as long as it does not solely rely on consumer credit scores, and the lender uses the business credit scoring model for its similarly sized non SBA guaranteed commercial loans. www.sba.gov/ma • Lenders must validate (and document) with appropriate and accepted statistical methodologies that their business credit scoring model is predicative of loan performance and they must provide that documentation to SBA upon request. The Business Credit Score must be documented in each loan file and be available forwww.sba.gov/ma SBA review. • If the lender does not have the ability to systematically analyze the borrower, the lender must collect and analyze business tax returns. • Lenders must verify the accuracy of the applicant's financial data using IRS Form 4506-T, before input into the ETAN system. www.sba.gov/ma Equity Requirements: • Adequate equity is important to ensure the long term survival of a business. Lender must determine if the equity and pro forma debt-to-worth ratio are acceptable based on their policies and procedures for their similarly sized, non SBA commercial loans. If the lender requires an equity injection and, as part of its standard processes, verifies the equity injection, it must do so for SLA loans How to Apply, cont. Step 2: E-Tran entry: • PLP lenders: continue with E-Tran origination process and receive SBA loan approval number via E-Tran system • Non-PLP lenders: (a) continue with E-Tran entry through “Validation” & “Submission”; (b) send application to the LGPC electronically: Email to [email protected]: lender’s contact info. & credit score screen-print copy of Forms 1919 & 1920 (Parts B & C) Lender’s credit memorandum any SBA forms specific to the project (i.e. 912) • Use ETRAN to upload files, new functionality • You may also use “send this file” a more secure option www.sba.gov/ma Did you know? For SLA loans If you upload the required (1919, 1920 parts B & C and your credit memo) documents in ETRAN, you are not required to include them again in your email to [email protected] Please remember: You must still send the email, and include message that the required documents are uploaded to ETRAN and include the application number. Non-PLP Submission Response 7(a) 85 Authorization & Closing • Loan Authorization – PLP lenders: create the SLA Authorization using a new Hybrid format – Non-Delegated lenders: SBA creates Authorization document & sends with approval • Closing & Disbursement – Meet requirements of SBA Loan Authorization – Lenders may use own Note and Guaranty forms but must include “Federal Language” – Disbursement procedures are the same as for similarly-sized non-SBA guaranteed loans Closing • When closing an SLA loan, lender must use same closing and disbursement procedures and documentation it uses for similarly sized non SBA guaranteed commercial loans. If lender using its own note form, the lender must ensure the note is legally enforceable and assignable, has a stated maturity and is not payable on demand. www.sba.gov/ma SLA Note Language • Additionally, 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 of 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.” SLA Guaranty Language If lender uses its own guaranty forms, the guaranty must include the following language; “When SBA is the holder, the Note and this Guarantee will be construed 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 purposesBy 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.” • Can obtain multiple SLA loans • Entire amount of loan proceeds may be used to refinance same institution debt (same as “regular 7a”) www.sba.gov/ma Borrower Portion & Lender Portion • Form 1919 • Form 1920 (A,B,C) Type Term only. (No revolving loans) Maturity & Guarantee • WC: 10 yrs. F&F, M&E: Useful life. Real estate: 25 yrs. • <$150K: 85% • >$150K: 75% Origination Guidelines for Small Dollar 7(a) Loans (<$350K) Origination • SBPS scored by SBA prior to approval • Processed via E-Tran. • • • • Credit Criteria • Verified income (4506) Use credit scoring Must consider management experience Debt service coverage ratio exceeds 1:1 on projected basis With the exception of loans under $50,000, the Small Business Applicant’s global cash flow coverage ratio exceeds 1:1 on a projected basis. Lender must document in the loan file the definition or formula used to calculate global cash flow. Interest Rate • Prime/LIBOR base rate. • SBA optional peg rate + 2.25% for maturities < 7 yrs. • Optional peg rate + 2.75% for maturities > 7 yrs. Collateral • < $25K: None • > $25K: Lender policy except must take business assets if available • Equity injections/Life Insurance: lender policy • Environmental: same as SBA Express Closing and Disbursing In closing and disbursing SLA loans, lenders will follow the same closing and disbursement procedures and documentation as it uses for its similarly-sized non-SBA guaranteed commercial loans. • Lender will retain all documents in the loan file. • Purchases and Liquidations will be handled out of the Little Rock Servicing Center (like Express) www.sba.gov/ma Working Capital and Contract Caplines Program Caplines 2.0: New and Improved 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 • Added option of delegated processing for PLP Lenders • Application: – Non-delegated: standard 7(a) application forms submitted to the LGPC. – Delegated: PLP lenders will use SBA Forms 1919 and 1920 (SBA Express forms) as well as their own documents, including the Lender’s Credit Memorandum rather than the standard 7(a) application forms (which are used for other PLP loans). E-tran submission for SBA approval is required. General Requirements • Maximum line amount $5,000,000.00. • Maximum guaranty amount limited to $3,750,000 to any one borrower and its affiliates. • Maximum guaranty percentage is 75% for loans over $150,000 and 85% for loans of $150,000 or less. • Maximum interest rate is the same as Standard 7(a). • Maximum maturity is 10 years. Short Term Revolving Debt Refinance Requirements 1. The short-term revolving debt must be terminated after it is paid off with the CAPLine. 2. The refinancing does not put SBA in a position to sustain a loss which the existing lender is presently facing. 3. The borrower has a sufficient borrowing base to support the Working Capital CAPLine plus any other short-term debt that is not being refinanced. 4. The refinancing is specifically identified in the Use of Proceeds section of the Authorization. 5. If refinancing Same Institution Debt (SID) – the application must be submitted to the Loan Guaranty Processing Center (LGPC) and may not be processed under Delegated Authority. www.sba.gov/ma 6. 7. 8. 9. . If the application includes the refinancing of same-institution, SBAguaranteed short-term revolving debt, in addition to the requirements of (1) through (5) above, the lender’s exposure to the applicant will not be reduced. Required Documents • A copy of the note(s) and an explanation of the terms and conditions of any debt(s) being refinanced. • A copy of the transcript of the account. • A borrowing base certificate with an aging of receivables and list of inventory, as necessary. If the short term revolving debt to be refinanced was not revolving in accordance with the terms of the note, the debt is not eligible to be refinanced under CAPLines. If the applicant defaults on the SBA-guaranteed loan within 90 days of the initial disbursement, the SBA may deny liability on its guaranty. Collateral Requirements – 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. • 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 80% 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 www.sba.gov/ma Determining Loan Amount 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. OR The lender may use the following formula: Example a.) Net Sales for prior year b.) Divide prior year net sales by 365 c.) Multiply daily sales figure by number of days to finance (whatever number is the business sales cycle) d.) The result will be the estimated working capital needs $1,000,000.00 Per year $2,700.00 Per day 30 Days $81,000.00 Estimated Need * The key is the correct calculation of the business sales cycle. Determining Disbursement Amount Using a BBC Determining Cash Cycle Days 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. Receivable Turnover (ARTO) days + Inventory Turnover (ITO) days Payable Turnover (APTO) days = Cash Cycle days Determining Cash Cycle Days (cont.) Determining Cash Cycle Days (cont.) Determining Cash Cycle Days (cont.) 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. • Repayments will come from cash sales and receivable collections. Proceeds must pay down the line as collected with availability to re-advance as long as the borrower is conforming to the maximum amount of the borrowing base certificate www.sba.gov/ma Determining Disbursement Amount Not Using a BBC – Using 1:1 Collateral Ratio If the lender is not using a BBC, determine the availability of funds for disbursement based on the following: A. Use a combination of factors for the underwriting and credit decision consistent with its similarly sized, non-SBA guaranteed commercial lines of credit. B. At a minimum complete: • Cash flow analysis to determine the adequacy, duration and dependability of cash flow. • Collateral analysis to establish an estimated value of collateral. • Owner/Guarantor analysis C. Assume full utilization of the LOC and secure with sufficient collateral to ensure a 1:1 collateral ratio. . 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). Level of Funds Control & Monitoring Using a BBC • 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 & Monitoring • 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 Not Using a BBC – 1:1 collateral • When a BBC is not used - the minimum requirements are: 1. 2. 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. . Application Process For Non-delegated - use Standard 7(a) application forms. For PLP - use SBA Forms 1919 and 1920SX Part C. The lender should also use their own documents including the Credit Memorandum. Use these in place of Standard 7(a) application forms used for other PLP loans. 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. Key Features of the 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. Key Features of the 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. Key Features of the Contract CAPLines program – Eligible Contracts/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 237 of the SOP 50 10 5(d) 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 www.sba.gov/ma 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. www.sba.gov/ma 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. www.sba.gov/ma Capline Program Summary Capline Program Summary Capline Program Summary 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. – Review the authorization to insure that it spells out the terms you intended for the loan – Make sure you adhere to the authorization and use the required forms. Loan Authorization • More experienced lenders may choose to draft the proposed authorization • The latest version of the wizard can be downloaded from SBA lender page • Lender prepares all Express Loan Authorizations Loan Modifications Teri Hendrix 916.735.1961 [email protected] Include Business name, loan number, lender phone/fax number ALL MODIFICATIONS DONE IN CA PRIOR TO FINAL DISBURSEMENT SBA Required Forms for “Regular 7A loans SBA Note Form 147 http://www.sba.gov/idc/groups/public/documents/sba_homepage/to ols_len147.pdf SBA Guaranty Form 148 http://www.sba.gov/idc/groups/public/documents/sba_homepage/se rv_tools_forms_lender_148.pdf SBA Compensations Agreement Form 159 http://www.sba.gov/idc/groups/public/documents/sba_homepage/se rv_tools_forms_lender_1597a.pdf SBA Settlement Sheet Form 1050 http://www.sba.gov/idc/groups/public/documents/sba_homepage/se rv_tools_forms_lender_1050.pdf SBA Form 722 Equal Opportunity Poster http://www.sba.gov/content/sba-form-722-10-02?form=lender Commercial Loan Service Center Little Rock, Arkansas Servicing [email protected] Fax: (202) 292-3878 504 Liquidation [email protected] Fax: (202) 741-6930 SBAExpress Purchases [email protected] Fax: (202) 292-3877 • New 7a Loan Servicing and Liquidation SOP 50 57 went into effect on 2/1/13 www.sba.gov/ma 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. • • • • • • • • • 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. • • • • • • Close loan according to Loan Authorization. Be familiar with SOP 50-10-5( 13 CFR, SOP 50-50-4 and Policy Notices, which can be found on Servicing website. Document, document, document all credit decisions, which should be reasonable and prudent. Service and Liquidate SBA Loan in the same manner as lender’s non-SBA loans. Include 7a Lender Matrix as part of lender’s documentation when approving requests under lender’s delegated, unilateral authority. Always check Servicing Website weekly for most recent version. File internal bank loan according to SBA’s Ten Tab Purchase Demand Kit. This is to ensure lender has all appropriate documents at the time lender demands SBA honor it’s guaranty. 2008 www.sba.gov (add local information on master slide) 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 Service www.colsonservices.com Telephone: 1-877-245-6159 e-mail: [email protected] What does all this mean to You? • Working with the SBA expands your “lending range” to small businesses • The Bank’s risk is mitigated by the SBA’s Guaranty • SBA loans can increase the bank’s profitability 9 www.sba.gov/ SBA.gov/for-lenders www.sba.gov/ma Questions?