SBA and USDA Lending 1/28/2014. Benefits of SBA Financing. Small Business Administration and United State Department of Agriculture

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1 SBA and USDA Lending Small Business Administration and United State Department of Agriculture Work in Partnership with Banks Encourage Banks to Lend to Businesses by Guaranteeing loans to reduce Lender Risk 54,107 SBA loans totaling $29.5 billion funded FYE 9/30/13 Benefits of SBA Financing Longer terms of up to 10 years for Non Real Estate and 25 years for Real Estate No Balloon Payments Competitive Interest Rates Low Down Payments Lower Collateral Requirements Loans Are Assumable 1

2 Available SBA Loan Programs 7(a) Loans 504 Loans Express Program CAPLine Program Allowable SBA Use of Funds Real Estate Purchase Building Construction Equipment Purchase Debt Refinancing Inventory Franchise Purchase Leasehold Improvements Business Acquisition Partner Buyout General Business Expansion Working Capital Payroll Advertising Start Up Costs 7(a) Loans Bank loans money SBA guarantees up to 85% of the loan amount. Bank loans up to $5,000,000 with guaranteed loan amount of up to $3,750,000 Use for commercial real estate purchase, construction, improvements, debt refinance, equipment purchase, working capital, start up, business expansion 2

3 7(a) Loans Terms and Fees Non Real Estate Use up to 10 year term Real Estate Use up to 25 year term Blended Maturity for Multiple Purpose Loan Fully Amortized with no Balloon or Call Declining 3 year Pre Payment Fee for loans with terms of 15 years or longer Typically Adjustable Rates Prime + Margin SBA Guarantee fee % of guaranteed portion SBA Loan Eligibility Must be for profit business Must be a small business less than $15 million tangible net worth & $5 million in average after tax net income for last 2 years (business and affiliates combined) Must be an active rather than passive business For Real Estate must be 51% owner occupied for existing building and 60% for new construction All owners of 20% or more of business must provide a full guaranty (individuals and entities) 504 Loan Program Real Estate Purchase/Construction and FF&E with 10+ year life Two loans made in partnership with bank and a Certified Development Corporation (CDC) Typically a 50 / 40 / 10 Loan; Bank 50% 1 st lien & CDC 2 nd lien Borrower Equity typically 10% (additional 5% for special purpose property, additional 5% for start up) Typical Maximum of $5 million on CDC loan, resulting in typical maximum project size of $12.5 million Bank can loan more than 50% of project for larger projects Cannot include inventory or working capital (can be financed through companion 7(a) loan 3

4 504 Terms and Fees 1st lien note terms and rate determined by lender minimum term of 10 years for real estate and 7 years for equipment 2 nd lien CDC/SBA note 20 year fixed rate note for real estate and 10 year fixed rate note for equipment Prepayment fee 2 nd lien note declining fee for half of note term Fee on first lien note determined by lender Fee on second lien note is approximately 2.25% of note amount and is added to the note SBA Express Loans Similar to 7(a) program but greater flexibility Program maximum total loan amount of $350,000 Loans can be term loans or lines of credit SBA typically guarantees 50% rather than 75% so guarantee fee is lower Banks can use their closing documents rather than SBA documents Working Capital CapLine Loans Revolving line of credit for working capital Maximum loan amount of $5,000,000 Typically one year renewable notes up to 10 year total Typically made against a borrowing base of accounts receivable inventory 80% of eligible receivables and 50% of inventory Typically monitored monthly Fees consistent with 7(a) program Rates may be variable or fixed Typically consistent with conventional asset based lines of credit 4

5 USDA Loan Program Financing for businesses located in rural areas Rural area is defined as any area not within the boundaries of a city or town with more than 50,000 inhabitants and the urbanized area contiguous and adjacent to such, as defined by the U.S. Bureau of the Census using the latest decennial census of the U.S. Eligibility Map at Business does not have to be a small business Business can be profit or non profit Passive and investment businesses are eligible (ex. Apartments) Collateral must typically be sufficient to secure loan USDA Program Benefits Terms up to 30 years for Real Estate Use No Balloon Payments Large loan size up to $10 million in a single loan and multiple loans can be made for same project to loan more than $10 million Flexible personal guaranty requirements (may be limited rather than full) Low equity requirements minimum 10% tangible balance sheet equity for existing businesses and 20% for new businesses Types of SBA Lenders Preferred (PLP)or Non Preferred PLP Lenders have the authority to approve loans on behalf of the SBA Every SBA lender must follow SBA requirements but lenders may have their own additional requirements and types of SBA loans and terms offered vary by lender Large banks typically have segregated SBA departments that do not work with conventional loan officers. SBA departments at smaller banks may work in partnership with conventional lenders to structure financing packages that may include a combination of SBA and conventional loans to meet the needs of borrowers. 5

6 Combination Loan Example #1 Borrower: Manufacturing company that had acquired another business under an inventory consignment agreement and lease of real estate and equipment 18 months prior to loan request. As part of acquisition, seller provided $1.5 million LOC with a borrowing base of inventory and A/R Financing Request: Borrower wanted to exercise purchase option on real estate and equipment for $1 million, $500,000 was needed for building improvements, possible need for additional equipment purchase, possible refinancing of seller line of credit (1) $1.4 million 504 loan for real estate acquisition and improvements ( 90 percent financing with 10% borrower down payment) (2) $1,800,000 SBA 7(a) 10 year term loan to pay off seller line of credit and purchase new equipment ( no cash down from borrower) (3) $1,000,000 conventional line of credit to provide new funds for A/R and inventory financing Combination Loan Example #2 Borrower: Furniture design business/showroom and art framing business. Borrower had acquired business out of bankruptcy three years prior to loan request and had leased building with a purchase option. Company had little balance sheet equity but considerable value in inventory acquired at a discount. Borrower had made $1,000,000 in leasehold improvements to building. Financing Request: $5.5 million for building acquisition and a line of credit to allow borrower to accept large corporate jobs. Borrower had an offer from a large bank of a $5 million SBA 7(a)a term loan for building acquisition (maximum 7(a) loan size) with no line of credit offer. (1) $5.5 million for building acquisition in the form of 2 pari passu loans $4.3 million SBA 7(a) loan and $1.2 million conventional loan loans share the collateral with a pro rata first lien position (2) $700,000 SBA CAPLine line of credit secured by inventory Combination Loan Example #3 Borrower: 30 yr old service company providing maintenance services to office buildings. Agreement to buy out 50% partner for $8 million. Business value mostly intangible and based on cash flow. Financing Request: $6 million in financing: $5 million for partner buyout, $500,000 for refinancing of existing business debt, $500,000 in the form of a new line of credit. The seller would carry a note for $3 million. Loan officer proposed conventional financing in the form of a $5.5 million 5 yr term loan and a $500,000 line of credit. The chief credit officer reviewed the proposal and due to the lack of collateral suggested SBA financing. (1) $5 million 7(a) 7 to 10 year term loan for partner buy out (2) $1,000,000 conventional line of credit with $500,000 used for debt refinancing and $500,000 in new funds ( secured by first lien on A/R) 6

7 Combination Loan Example #4 Borrower: Manufacturing and service company providing water treatment systems and services to schools, hospitals, office buildings. Existing bank customer with $2 million LOC that was fully advanced and not revolving. The lack of availability on LOC was restricting company growth. Financing Request: Company needed additional line of credit availability to finance growth. LOC had been utilized for permanent working capital rather than for just short term financing of A/R and inventory. The company had no term debt. The borrower asked the loan officer for suggestions on financing options. (1) $1,500,000 7(a) 10 yr term loan to pay down line of credit, leaving $500,000 balance on LOC (2) Existing LOC modified and reduced to $1,500,000, resulting in $1,000,000 in additional availability (LOC retained a first lien on A/R and inventory and SBA loan secured by FF&E with minimal value and second lien on A/R and inventory subject to conventional LOC) USDA Loan Examples $28 million Marina acquisition $20 million USDA guaranteed loan; Five owners each providing a limited personal guaranty of 20% of loan amount Chemical Plant $30 million USDA loan for refinancing of term debt, terming out of line of credit and financing of plant improvements; $9 million conventional line of credit for A/R and inventory financing; full personal guaranty of 100% owner $4.4 million acquisition of 3 apartments near a university $3.5 million USDA loan; No personal guaranties 7