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!
QUESTIONS???
(Applause???)
Give us a call!!!