Helping lenders help small businesses
The Small Business Jobs Act of 2010
directed $1.5B in federal funding for
supporting state programs designed
to increase access to capital and
assist Washington’s small businesses
to grow and create new jobs.
Washington State will receive
$19.7M, which will be distributed
through 3 programs.
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$20 million in projected venture capital funding
available
W-Fund Investments to include early or “seed”
stage life science, biotech, medical device,
alternative energy, and IT companies and new
developments
Apply at www.TheWfund.com
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$70 million in projected funding available
Craft3 Funds will concentrate in providing
assistance to small businesses in underserved
communities
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Will provide financing through Washington state’s
CDFI network
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Focuses on assisting Special Asset credits and
loans requiring creative structuring.
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Up to $6 million in funding available
The Capital Access Program encourages new lending by
allowing credit unions to offer loans to businesses that
might otherwise fall slightly short of conventional credit
underwriting by providing additional loan insurances
CAP provides borrowers the flexibility to design the
program around their existing internal processes
What is CAP?
• Contributions into a reserve account at your credit union
• Allows participating lenders to approve loans and retain or
attract small business customers.
• Aim to maintain valued customer relationships with participating
bank.
• Support financing for small businesses fallen to marginal by
contributing to lenders’ loan loss reserves.
• Borrower’s credit is solid, but not enough to secure traditional
bank loans.
• Broad eligibility. Most businesses qualify including non-profits.
How CAP Works…
• Loan enrollment is fast and easy.
• Commerce’s role simply to ensure that the borrower and
loan purpose meet eligibility criteria.
• Lender and borrower pay premiums into a designated
reserve account at the participating bank.
• Commerce matches lender and borrower premiums on a
loan-by-loan basis.
• The lender can make claims against funds to cover losses on
enrolled loans/LOCs.
• Losses can be recovered on loans that are written off and
many occur prior to collateral collection.
Growing the Reserve Account
Borrower: 1-3.5%
Lender: 1-3.5%
WCAP: 2-7%
Scenario:
• Lender enrolls 10 loans totaling $500,000
• $60,000 goes in the loss reserve account (using an average premium of 3%
each from the lender and borrower, 6% from CAP for a total of 12%)
• An enrolled loan defaults with a $50,000 outstanding balance (P&I)
• Lender is reimbursed 100% of the claimed loss, $10,000 remaining balance.
What Type of Loans Qualify?
“Business Purpose,” term loans and lines of credit including:
• Start up costs
• Purchase of equipment/inventory
• Other projects including working capital
• Acquisition, construction, or renovation of a place of
business
• Franchise fees
INELIGIBLE LOAN PURPOSES
•
Financing a non-business purpose
•
Passive real estate investment
•
Refinance the financial institution or an affiliates existing debt without a new
credit determination (delinquency cannot be refinanced).
•
Fund any unguaranteed portion of an SBA loan
•
Purchase any portion of ownership interest from existing owner (cash out)
•
Reimburse funds owed to any owner, including any equity injection or
injection of capital for the business’ continuance
•
Repay delinquent federal or state income taxes unless the borrower has a
payment plan in place with the relevant tax authority
•
Repay taxes held in trust or escrow
How Does the Process Work?
• 1-page One time Bank Participation Application
• Standard Bank Participation Agreement
• 2-page Loan Enrollment Form with Certification
• 1-page Loan Modification Form
• 1-page Loan Claim Form
• Reporting is quarterly / annually
Flexibility for Banks
• Lender determines source of their premium funds (e.g. the
borrower)
• Flexibility on the premium rates to invest (2-7%*)
• Lender chooses to enroll all or a portion of a loan, including
increases
• May refinance enrolled loans without having to obtain
Commerce approval
• Enrolled loans may be modified by extending terms /
amending covenants / releasing collateral without needing
Commerce approval
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Allows Credit Unions to build their small business loan
portfolio
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Loan enrollment approvals are fast
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Loan terms are determined by the Credit Union
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Commerce takes no position on the collateral
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The Reserve Account is pooled within each institution
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Reporting requirements are minimal
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Program support includes Commerce staff, a program specific
website and a graphic based lender manual
The borrower wants to increase their existing enrolled loan
by $20k to do site improvements. How does this affect loan
enrollment?
It is at the credit union’s discretion whether they chose to
enroll the increase or not. If they choose to enroll the
increase, then the reserve contributions from all three parties
are pro-rata and would only apply to the increased amount as
the former amount was already enrolled.
Your institution has an existing loan on the books which you wish to enroll.
Can you?
Financial institution lenders are generally prohibited from refinancing an existing
outstanding balance or previously made loan from an existing borrower.
However, you may use CAP to support a new extension of credit that repays the
amount due on a matured loan or line of credit when all the following conditions
are met:
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the new loan or line of credit includes the advancement of new monies to a
small business borrower (excluding closing costs)
the new credit supported with a new credit determination
proceeds from the new credit may only be used to satisfy the outstanding
balance of a loan or line of credit that has already matured or otherwise
termed and the prior debt was used for an eligible business purpose
the new credit has not been extended for the sole purpose of refinancing
existing debt owed to that same financial institution lender.
You have enrolled a revolving line of credit that has now
matured. Do you need to re-enroll it and pay new premiums?
Each credit union has the flexibility to determine whether
they want the initial premium and subsequent renewals of a
LOC to stay enrolled OR they may choose to require the
borrower to re-enroll at each renewal (requires a new
enrollment form and premiums).
An enrolled $100,000 loan has been paid down to $70,000,
but the credit union is forced to charge off the remainder. Can
the full $70,000 be reimbursed from the CAP loss reserve
account?
The lender could issue a claim to CAP upon write-off for the
amount of the write-off including 90 days worth of interest
owed as well as some collection costs up to the total balance
currently in the reserve account. If the Reserve funds were
insufficient, the additional $ could be collected by the credit
union up to 24 months after the original claim was made from
funds in the reserve up to 75% of the reserve balance at the
time the follow-up claim was made.
Your potential borrower asks for a loan to buy a commercial
property for their business but the LTV is high, what can be
done?
The Lender can choose to enroll only a portion of the loan to
cover just the high LTV amount. This allows the credit union
to approve the loan and mitigates the risk of a higher than
normal LTV.
Your borrower is seeking an SBA 504 loan and you are
uncomfortable carrying the debt for the 60 days it takes the
SBA to confirm their approval. How can CAP help?
The Credit Union can choose to enroll the bridge loan into
CAP to secure additional risk mitigation. Since bridge loans
are short term this would allow the credit union to quickly
build up their CAP reserve account.
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Before accepting CAP funds, a Washington state chartered
credit union or federal chartered credit union must be an
approved public depositary.
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Application to be a public depositary must be approved by the
State Treasurer’s Office.
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The maximum CAP deposit is $250,000 per government
custodian, i.e. Dept of Commerce.
21
Date of Application
James L. McIntire, Chairman
Public Deposit Protection Commission
PO Box 40206
Olympia, WA 98504-0206
Dear Mr. McIntire:
(Credit Union Name), headquartered in (City), Washington, requests authority to
accept Washington public deposits in accordance with Revised Code of Washington
(RCW) 39.58.240. Along with this letter, we are submitting the following items to the
Public Deposit Protection Commission (Commission) for their consideration in
approving (Credit Union Name) as a public depositary for Washington State.
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Certificate of Insurance issued by the NCUA
Certificate of Authority issued by the Department of Financial Institutions
The Credit Union agrees to comply with:
1. Deposit limitations set forth in RCW 39.58.240, and
2. Monthly reporting requirements, in a format supplied by the Commission,
indicating the amount of public funds on deposit for each depositor as of the last
day of each calendar month. Report due within eight business days following
month end.
Sincerely,
President, CEO, or Designated Signee
Nancy Adams, Administrator, Office of the State Treasurer
Linda Jekel, Director of Credit Unions, Dept. of Financial Institutions
22
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Public Deposit Protection Commission website:
◦ http://www.tre.wa.gov/investors/pdpc.shtml
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Authorization letter and web access forms are available from
Nancy Adams at:
◦ nancy.adams@tre.wa.gov
Go to the website at
ChooseWashington.com
Call the Program Manager
Jane Swanson
(360) 725-4062