SBA 7a Training
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Over 80% of Rhode Island Loans fall below $150,000!
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504 lending is up 35%!
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Dollars are up 18%!
Smart.Bold.Accessible
Hello MA & RI Lenders !
https://www.youtube.com/watch?v=TPNnRVgL
SBs
SBA en español
• Goes live on April 7 ,2015
• Spanish version of SBA.gov
• Can be previewed at https://es.sba.gov/
All SBA 7(a) Loans of $150,000 or less have:
– NO Guaranty fee
– NO on-going servicing fee for the lender
– 51.9 basis points for loans above $150,000
YTD savings $500,000 in MA
YTD savings $100,000 in RI
ALL SBA Express loans to VETERANS
– No guaranty fee up to $350,000
Extended thru 9/30/15
SBA Veteran
Advantage
All SBA loans to eligible veterans:
– reduces the up-front guaranty fee from 3%
to 0% for SBA Express loans over $150,000
– Note that there is no reduction in the
Lender’s annual service fee for loans over
$150,000
– All other 7(a) loans: guaranty fee is reduced
50%
To Qualify
Businesses must be 51% or more owned and controlled by
an individual or individuals in one of the following groups:
• Veterans (other than dishonorably discharged)
• Service-Disabled Veterans
• Active Duty Military service member participating in the
military’s Transition Assistance Program (TAP)
• Reservists and National Guard Members
• Current spouse of any Veteran, Active Duty service
member, or any Reservist or National Guard member; or
widowed spouse of a service member who died while in
service or of a service-connected disability.
SOP 50 10 5(G)
• A MUST READ
• 364 pages of information
gold
Effective Date
10/01/2014
• Find your answer FAST w/
Ctrl Button + F
Personal Resource Test
Credit Elsewhere Test Remains
The purpose of the Credit Elsewhere test is to
determine if the Small Business Applicant has the
ability to obtain some or all of the requested
loan funds on reasonable terms from non-Federal
Federal sources without SBA assistance.
SOP (G), Page 84
• IRS Tax Transcripts must be reviewed PRIOR to submission to
Citrus Heights on all non-delegated lenders
– prior to disbursement on delegated loans
• All 7a loans will use Forms 1919 & 1920
– No more Form 4 or Form 4-I
•
Lenders may use their own Note & Guaranty
– Must be legally enforceable & assignable, have stated maturity & not be
payable on demand
– Must include “SBA Language” re: interpretation & enforceability
– If selling on the Secondary Market using Forms 147 & 148 is recommended
What language ?
Your own note:
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 or 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.”
Your own guaranty:
“When SBA is the holder, the Note and this Guarantee 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 or local control, penalty, tax, or liability. As
SOP 50 10 5(G) Subpart B
Effective Date: October 1, 2014 203
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.”
SOP (G), Page 202
Electronic Signatures
Effective January 1, 2015:
7(a) and 504 lenders may utilize electronic signatures in
accordance with the performance standards outlined in
Notice on SBA Forms and other documents requiring
signatures
Electronic Signatures Cont.…
To maintain an electronic credit file for SBA loan customers, you can
have all required documentation housed electronically as long as it can
be made available (in either paper or electronic format) at the time of
guaranty purchase or audit/review by OCRM.
In addition, there are certain SBA forms and bank documents that must
be retained in original format with original signatures. It includes
authorizations, 912s, SBA application forms, and collateral documents
such as notes, guaranties and security/mortgage documents. Also,
Form 159 (for 7a) and whatever the lender needs to keep original/wet
signatures that their regulator(s) and/or own legal wants.
7(a) Guaranteed Loan Program
Standard
7a
7a Small
Loans
SBA
Express
PLP
Maximum Loan Size = $5,000,000
The 7a Loan Guarantee Program
7 (a) Loan Program
Details
7(a) Loan Program
Maturities & Interest
Rates
7(a) Program
Guarantee Fees
• SBA’s Primary Business Loan
Program
• 5-10 years for working
capital, machinery, equipment
• 2% on loans up to $150,000*
• Broad eligibility requirements
• Wide range financing options
• Maximum loan amount
increased from $2 million to
$5 million
• 85% guarantee on loans up
to $150,000
• 75% on loans > $150,000
• Up to 25 years for real
estate, construction
• Prime + 2.25% for loans of 7
years or less
• Prime + 2.75% for loans over
7 years
• Rates can be higher for
smaller loans
• 3% on loans $150,001 $700,000
• 3.5% on loans $700,001 • $ 1 million
• 3.75% on loans > $1 million
• *fee waiver for FY 15
Why Do Lenders Use the SBA Guaranty?
 Longer maturities are needed
 Collateral may be inadequate to meet normal
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underwriting
Start-up or certain types of businesses
Business leverage
Lender’s legal or policy limit
Minimize risk
SBA Size Standard
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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
SOP (G), Page 76
Eligible Use of Loan Proceeds
SBA loans may be used to:
•
•
•
•
•
•
•
•
Purchase machinery, equipment, fixtures, buildings
and land for business
Finance receivables and augment working capital
Refinance existing debt - including credit card debt
Finance seasonal lines of credit
Expand, renovate facilities
Construct commercial buildings
Change of ownership/purchase of a business
Most legitimate business purposes
SOP (G), Page 107
Eligibility Requirements
•
•
•
•
•
•
•
For profit
U.S. citizens or owners w/ green card status
Not exceed SBA size standards
Owners must be of good character
Owners must possess management ability
and have experience in field.
Demonstrate repayment ability
Not engaged in lending, real-estate
development, investments or speculation
Ineligible Use of Proceeds
•
Repay delinquent IRS withholding taxes, sales taxes or similar funds held in
trust.
•
Provide or refinance funds used for payments, distributions, or loans to
Associates of the Applicant, except payment of ordinary compensation for
services rendered at a fair and reasonable rate.
SOP (G), Page 108
Loan Guaranty Percentages
85%
7(a) loans under
$150,000
75%
7(a) loans over
$150,000
50%
SBA Express
SOP (G), Page 125
7(a) Guaranteed Loan Program Fees
Based on guaranteed portion
Loan Size
Fees
$150,000 or less
Zero
$150,000 - $700,000
3% of guaranteed
portion
$701,000 $5,000,000
3.5% of guaranteed
portion (3.75% of
guaranteed portion
over $1 million)
Short Term Loans –
Up to $5 Million
0.25% of guaranteed
portion
SOP (G), Page 138
Notes
Maturities
Exceed 12 months
Maturities of 12
months or less
7(a) Loan Interest Rates
Vary by loan size and maturity
Full list found in SOP (G), Page 132
Credit Underwriting
Standards
Credit Underwriting Standards Separated
7a small
Loans
• Credit
scored
Underwriting
Standards
7(a) over
$350,000
Any
Express
Loan
• Full
Analysis
• No change
- Follows
your bank’s
procedures
Lets Talk SBA Express
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Maximum Loan Amount: $350,000
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Fast Turnaround time
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Guaranty on a true Line of Credit
Express Benefits Continued…
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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
Top Issues Found
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No Express Authorization in Credit file
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For LOC, must include maturity date in note
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Ex. On demand but no later than 04/xx/2022
SBA Credit Scoring for loans up $350,000
All applications begin with credit scoring
Predict risk more accurately than complex underwriting
Similar to liquid credit from FICO/Dun & Bradstreet
Takes information from Business Credit Bureau to generate score
• Commercial loan, lease, and card data
• Number of trades and utilization
• Sales Figures
• Number of years in business
• Number of Employees
• Ratio information as compared to industry averages
•
•
•
•
•
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Guarantor credit scores
Does not apply to SBA Express Loans
Credit Score a Loan
1)
2)
Begin in ETRAN
Input required data

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Loan details
Owners of 20% or more name, SSN, address
Business name, address, phone, EIN, DUNS (if available)
3)
Click the Check Credit Score button*
4)
Credit Score will be generated
*soft credit hit to applicants
Loan scored less than 140?
Go SBA
Express
Send it in
to SBA
• Resubmit under SBA Express for 50% guaranty
• No questions asked
• PLP lenders can use their delegated authority
OR submit to LGPC for reconsideration
• Non-PLP lenders must submit the full 10-tab to
LGPC for review
Note: Lender does a full underwriting as required for a Large 7(a) loan
Credit Analysis
An Acceptable Credit Score indicates the applicant is credit worthy:
There is no need to discuss the following in your credit analysis:
Credit history of the applicant
The strength of the business
Historical earning and projected cash flow
The applicants ability to repay the loan
-
No debt service coverage requirement
-
Financials still must be obtained, but don’t need to be spread
-
IRS 4506-T is still required:
Verifies the business is small
Verifies the business pays taxes
Fraud prevention
Credit Analysis Continued…
-
Still Must Cover:
- Business History
- Management Team Analysis
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Length of Time in business, undercurrent management, depth of the
management, industry or related experience
Analysis based on lender’s policies and procedures for
similarly sized non-SBA guaranteed loans:
-
Owner/Guarantor Analysis
-
-
PFS analysis
Obtain personal financials & complete an analysis based on personal cash
flow analysis or credit scoring
Equity and Debt-to-Worth must be analyzed
Equity injection requirements match lender’s similarly sized nonSBA guaranteed loans
Collateral, Affiliates & Credit Memo
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List collateral and estimated values, if secured
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Affiliates Consideration
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Appraisals & formal valuations are not required unless they would
normally be required by the lender on non-SBA Guaranteed loans
Size Determination
Outstanding Guarantee Eligibility
Repayment ability – will they positively or negatively impact the
borrower’s ability to repay the SBA Guaranteed loan
Credit Memo Template
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Part A states the customer’s credit score
Part B covers the remaining points.
SBA does not require you use our “template”
Credit Memo Sample
What Else?
Multiple Loans in a 90 day Period – Second loan takes the
customer over the $350,000 Aggregate
-
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Customer’s Second Loan MUST be underwritten to large 7a
standards
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CASH FLOW ANALYSIS CANNOT BE WAIVED
If a loan goes to purchase:
-
-
Debt Service Coverage will NOT be a point of discussion at
purchase if:
-
The loan was approved on or after July 1, 2014
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The loan scored 140 or higher
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The loan was not the companion loan that pushed the borrower’s aggregate loan
amount over $350,000 within a 90 day period
Small 7(a) Loan Purchases will be handled in Little Rock
Credit Memo
For Loans of $350,000 or Less
Lenders must verify and reconcile the applicant’s
financial data against income tax data prior to submitting
a request for guaranty for a loan of $350,000 or less
using Standard, CLP, or PLP processing.
Prior to submission for all non delegated loans
Prior to disbursement for delegated loans
Equity Injection
Lenders must verify the injection prior to disbursing loan proceeds and must maintain evidence of such
verification in their loan files. Verifying a cash injection requires the following documentation:
A copy of a check or wire transfer along with evidence that the check or wire was processed showing the
funds were moved into the borrower’s account or escrow;
A copy of the statements of account for the account from which the funds are being withdrawn for each of the
two most recent months prior to disbursement showing that the funds were available; and
A subsequent statement of the borrower’s account showing that the funds were deposited or a copy of an
escrow settlement statement showing the use of the cash.
A promissory note, “gift letter” or financial statement is not sufficient evidence of cash injection without
corroborating evidence consistent with paragraph above
Lender must determine if the equity and the pro-forma debt-to-worth are acceptable based on its policies
and procedures for its similarly-sized, non-SBA guaranteed commercial loans. If the lender requires an
equity injection and, as part of its policies and procedures for its similarly-sized, non-SBA guaranteed
commercial loans verifies the equity injection, it must do so for SBA loans.
SBA Application Process
Key Changes to Application
Process
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Universal set of forms for all 7(a)
Lenders may use their own Note and Guaranty forms
Business Financial Statements required to be dated within
180 days of submission to SBA, not 90
Personal financial statements to be dated within 90 days
of submission to SBA
2 Forms for all 7(a) loans
BORROWER
LENDER
Personal Financial Statement

Dated within 90 days of submission

Use your own form or SBA Form 413

Must be submitted for all officers, directors,
principals and 20% owners, and spouses
SOP (G), Page 191
Business Financial Statements
Year End Balance Sheets and Profit/Loss
Statements for previous 3 years
 Statement of Net Worth
 Interim Balance Sheet and Profit/Loss
Statement ( no less than 180 days old)
 Cash Flow Projection
 Same statements for any
affiliates/subsidiaries

CAIVRS
Used to determine if any of the individuals or businesses have
outstanding Delinquent Federal Debt
When?
Bank approves the loan
• Ex. SBA Express, PLP
IF SBA approves the loan
• SBA will run report
Inquiries related to listing

SBA Procedural Notice 5000-1334
Inquires for individuals/business in CAIVRS
are submitted to SBA’s Birmingham’s Offset Division

Only for positive hits in CAIVRS
IRS Form 4506-T
(Request for Transcript of Tax Return)
SBA’s Tax Verification process is to determine if:


Small Business Applicant filed business tax returns; and
Small Business Applicant’s financial statements provided as
part of the application agree with the business tax returns
submitted to the IRS.
Non Delegated
When ?
Prior to submission
Delegated
SOP(G), Page 182
Prior to 1st disbursement
IRS Form 4506-T
(Request for Transcript of Tax Return)
Required for the last 3 years(unless Borrower is a start-up
business)
For a sole proprietorship, the lender must verify the Schedule C.
For a change of ownership, the lender must verify the seller’s
business tax returns or a sole proprietor’s Schedule C. Where
there is an acquisition of a division or a segment of an existing
business, other forms of verification may be used in lieu of the
4506-T (e.g. Sales tax payment records).
SOP(G), Page 182
IRS Form 4506-T
(Request for Transcript of Tax Return)
Important include signature, title, and date in bottom section
If a Small Business Applicant has not filed required federal tax
returns, the applicant is not eligible for SBA financial
assistance
# 1 REASON SENT TO WRONG FAX NUMBER
SOP(G), Page 182
Form 912
If your borrower has answered “Yes” Question 1:
APPLICANT IS NOT ELIGIBLE FOR AN SBA LOAN
If borrower answers “Yes” to Question 2 or 3:
You must complete the 912 FORM
If response to question 3 reveals that he/she is
currently on parole or probation, then the Small Business Applicant is
not eligible.
912 Processing
• Normal Processing time is 6-8 weeks
• Name Checks take longer to process
• FBI recently installed new computer
reporting system
SOP 50(G), Page 90
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
Debt Refinancing: Unreasonable Terms
Existing debt is presently on unreasonable terms if it is:
a) short or long term debt structured with a demand note or balloon payment;
b) debt with an interest rate that exceeds the SBA maximum interest rate for
the processing method used;
c) credit card obligations used for business related purposes;
d) debt that is over collateralized (however, the SBA guaranteed loan must
meet SBA collateral requirements).
e) revolving lines of credit (short or long term) where the original lender is
unwilling to renew the line or the applicant is restructuring its financing in
order to obtain a lower interest rate or longer term;
f) debt with a maturity that was not appropriate for the purpose of the
financing (e.g. a 3 year term loan to finance a piece of equipment with a useful
life of 15 years);
g) debt used to finance a change of ownership under certain conditions
h) debt the Lender believes no longer meets the needs of the Small Business
Applicant.
SOP 50(G), Page 109
Debt Refinancing: Credit Card
Criteria: Used for business purposes
The borrower must certify that the amount being
refinanced was used exclusively for business purposes
and provide appropriate documentation, such as a copy
of the note and/or current loan statement, to
demonstrate that the debt was, in fact, used for
business purposes.
SOP (G), Page 110
Debt Refinancing: Another Lender
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


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Requires “substantial benefit” to applicant
Looks to 10% improvement in monthly payments (P &
I)
SBA requires copies of all notes that will be
refinanced
Demand, interest only, balloon notes will automatically
meet substantial benefit test
Debt Refinancing: Lender’s Own Debt

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Must adhere to previous provisions
In addition, must submit to SBA a transcript of
account showing that the debt has never been
more than 29 days past due, within the last 36
month period.
New loan must not reduce the lender’s existing
credit exposure to the borrower (only applies to
Express)
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.

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”
CHANGE OF OWNERSHIP/
BUSINESS VALUATION
A “qualified source” is an individual who regularly receives compensation
for business valuations and is accredited by one of the following recognized
organizations:





Accredited Senior Appraiser (ASA) accredited through the American Society of
Appraisers;
Certified Business Appraiser (CBA) accredited through the Institute of Business
Appraisers;
Accredited in Business Valuation (ABV) accredited through the American
Institute of Certified Public Accountants;
Certified Valuation Analyst (CVA) accredited through the National Association
of Certified Valuation Analysts; and
Accredited Valuation Analyst (AVA) accredited through the National Association
of Certified Valuation Analysts.
SOP (G), Page 167
Business Purchase Forms Needed
Copy of Buy-Sell Agreement
Seller Financial Statements for previous 3
Years
 Pro forma Balance Sheets
 Interim Statements ( no less than 180
days old)


Collateral
One of the primary reasons lenders use SBA is for those
Small Business Applicants that demonstrate repayment ability
But lack adequate collateral to fully repay the loan if the loan defaults
SBA does not permit its guaranty to be used as a substitute
for available collateral.
Collateral
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Collateral is NOT required for loans of $25,000 or less
Collateral is required on loans of more than $25,000 up to $350,000
with the lender following their own collateral policies & procedures
for non-SBA guaranteed loans BUT at a minimum the lender must
obtain a lien on the applicant’s fixed assets to secure the loan
For loans in excess of $350,000 the loan must be collateralized to the
maximum extent possible UP TO THE LOAN AMOUNT
Trading Assets MAY be skipped with the lender going directly to
personal real estate if trading assets are needed as collateral on a LOC
An SBA Guaranty CANNOT be used as a substitute for available
collateral
Express collateral has not changed. Banks must follow same policies as
non SBA portfolio.
For loans above $350,000
All Requests for 7(a) Guarantee of loans greater than
$350,000 processed through Standard, CLP, or PLP
procedures,
Lender’s analysis must demonstrate the Small Business
Applicant’s ability to repay the loan from the cash flow
of the business.
The Analysis should conclude that repayment ability of
the proposed SBA loan and all other debt reasonably
exists from the operating cash flow of the business
defined as earnings before interest, taxes, depreciation
and amortization (EBITDA);
Debt Service Coverage
The small business applicant’s debt service
coverage ratio (OCF/DS) must be 1.15 to 1
or greater on a historical and/or projected
basis.
Submission of Application for Guaranty
All Submissions via E-Tran
Request User ID/Password
ETRAN
Service
Input New loan
69
E-Tran In Process Application
Navigation Tree
Save/Next
Lender Comments Tab
Allows for comments on the loan application
Reporting to Credit
Bureaus
Lenders are required to report commercial account
information
Submits reports to commercial credit bureau
reporting agencies
Reporting of guarantors is not required
Servicing and Liquidation
7(a) Lender Matrix
Matrix Continued…
All 7(a) lenders will be required to notify SBA via E-Tran
for the following unilateral actions:
- Cancel the SBA Guaranty*
- Extend the Maturity Date (prior to the stated maturity
expiring)*
- Change the loan from revolving to non-revolving
- Change the Borrower’s name or address
- Assumption of the loan without release of an Obligor (adding a
borrower)
- Adding a Guarantor to the loan
- Classify the loan in “liquidation” status
Note: After entering the appropriate information into Etran, no
further action is required
https://www.sba.gov/for-lenders
Little Rock Servicing Center
Lrsc.servicing@sba.gov
SBA One
Upcoming Events
For more information, please contact Matt Sisk at 617-565-5569 or matthew.sisk@sba.gov
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Rhode Island’s SBW Celebration:
May 13th at noon
Alpine Country Club
Cranston, RI
MA District Office SBA Contacts
Tipp O’ Neill Federal Building
10 Causeway Street Room 265
Boston, MA 02222
Anne Hunt
Deputy District Director
617-565-5577
Anne.Hunt@sba.gov
Carlos Hernandez
Lender Relations Specialist
617-565-5565
Carlos.hernandez1@sba.gov
Gregory Gould
Lender Relations Specialist
U.S. Small Business Administration
380 Westminster Street - Suite 511
Providence, RI 02903
(401) 528-4630
Gregory.Gould@SBA.gov