7(a) Loan Guaranty Program
March 5, 2019 @ 11 a.m. Eastern
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7(a) Loan Guaranty Program
March 5, 2019
Presenters – Brendell Givens & Bill Reed
WHO ARE WE?
7(a) LOAN GUARANTY PROCESSING CENTER (LGPC)
… AND WHAT DO WE DO?
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The mission of the Center is to efficiently process 7(a) loan guaranty applications and to provide assistance and oversight, as necessary, to lenders before and after submission.
LGPC MISSION STATEMENT
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7A LGPC LOCATIONS
6501 Sylvan Road, Suite 122 Citrus Heights, CA 95610 Phone: (877) 475-2435
262 Black Gold Blvd Hazard, KY 41701 Phone: (606) 436-0801
General Questions:
Phone: (877) 475-2435 [email protected]
Loan Mods (prior to full disbursement):
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LGPC LEADERSHIP TEAM
Betty Hill Assistant CD, Policy
Theresa “Teri” Hendrix Loan Modification Supervisor
Kristi Harris LP Support Supervisor
Gregory Prichard Center Director
Annette May Deputy Center Director
Eric Aylor Loan Processing Team Supervisor
Brendell Givens Loan Processing Team Supervisor
Kimberly Bury Loan Processing Team Supervisor
Bill Reed Loan Processing Team Supervisor
Vacant Deputy Center Director, Hazard
Loan Processing Activities Customer Service Departments
Customer Service Liaison/ 7a Questions
eTran Support
Lgpc workflow
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The completeness of the submission package will impact the efficiency of the processing timeline.
LGPC WORKFLOW
Who Must use the lgpc
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Non-Delegated Lenders
All 7(a) Loans (except SBA Express and Export Express)
Delegated Lenders (In the following scenarios)
Refinance of Same Institution Debt (SID), refinancing a 504 Loan, when using “no longer meets the needs of the business” for refinance and change in ownership debt refinance within 6 months
Financing of an OREO property
A Delegated Lender that is making a personal loan to the borrower for the required equity injection
Where there is a potential conflict of interest with the lender
An owner of 10%, or more, is an SBA employee, former SBA employee, or Member of Score or Congress
When there is known environmental contamination or on-going remediation at the property
WHO MUST USE THE LGPC
Who Must use the lgpc
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Standards of Conduct Committee approval required – Examples include:
A SBA employee, or the household member of an SBA employee, is a sole proprietor, partner, officer, director, or stockholder with 10% or more interest in Applicant
Former SBA employee who has been separated from SBA for less than 1 year is an employee, owner, general partner, managing member, attorney, agent, owner of stock, officer, director, creditor or debtor of the Applicant
A member of Congress, or an appointed or employee of the legislative or judicial branch of the Federal Government, or a Small Business Advisory Council, or a SCORE volunteer is a sole proprietor, general partner, officer, director, or stockholder with 10% or more interest, or a household member of such individual, of the Applicant
WHO MUST USE THE LGPC
WHAT SHOULD YOU SUBMIT TO THE LGPC?
… AND HOW DO YOU DO IT?
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SBA One or E-TRAN Origination 1. Create an application 2. Answer required questions 3. Verify data 4. Attach documents 5. Submit Status will change from “Application in Process” to “Review Reviewer 1” If the status is anything other than “Review Reviewer 1” the file will not transmit to the LGPC. For questions regarding SBA One, contact Colson’s SBA One support services at
[email protected] or 877-245-6159, Call Option 5 For questions regarding E-TRAN, contact Ryan Gerald at [email protected] or
Glenn Hannon at [email protected] For general submission questions contact [email protected]
SUBMISSION METHODS
What needs to be included?
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For submissions to the Center Small & CA Loans Regular 7(a)
Form 1919 (complete Borrower Application) X X
Form 1920 (complete Lender Application) X X
Lender Credit Memorandum (see detail page) X X
Personal Financial Statements for all principals owning 20% or greater
X
912s (where required) * X X
USCIS Verification (where required) * X X
Business Financials (Interim + 3 prior yrs.) including debt schedule
X
Projections with reasonable assumptions for start-ups and change of ownership
X
Affiliate Financials (Interim + 3 prior yrs.) X
* We suggest submitting the following forms to the appropriate Agencies as early in the application process as possible to avoid any unnecessary delays in the application process: Form 912 Statement of Personal History and Form G-845
WHAT NEEDS TO BE INCLUDED?
What else should be included?
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For submissions to the Center Small Loan & CA Loans Regular 7a
Copies of notes, security agreements, leases, or other documentation evidencing the debt to be refinanced
X X
Transcripts for Same Institution Debt (SID) X X
Copy of Business Purchase Agreement X X
Seller Financials signed by Seller (Interim + 3 prior yrs.) X
Internal or External Business Valuation per SOP guidelines X X
Real Estate Purchase Agreement X X
Real Estate Appraisal (OREO properties only) X X
Franchise Documents, if applicable (see next page for detail) X X
Management Agreements X X
Detailed Listing of Collateral X X
Lender’s Environmental Questionnaire X
Draft Loan Authorization (delegated Lenders only) X
* We suggest submitting the following forms to the appropriate Agencies as early in the application process as possible to avoid any unnecessary delays in the application process: Form 912 Statement of Personal History and Form G-845
WHAT ELSE SHOULD BE INCLUDED?
Who needs to complete the form 1919?
Make sure that the current form is used and that each 1919 is signed and dated.
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For ALL Regular 7(a) Processing including Small & CA Loans
For a sole proprietorship, the sole proprietor
For a partnership, all general partners, and all limited partners owning 20% or more of the equity of the firm, or any partner that is involved in management of the applicant business
For a corporation, all owners of 20% or more of the corporation and each officer and director
For limited liability companies (LLCs), all members owning 20% or more of the company and each officer, director, and managing member
Any person hired by the business to manage day-to-day operations
WHO NEEDS TO COMPLETE THE FORM 1919?
Make sure that each 1919 is initialed, signed and dated.
What should be covered in your Credit Memo?
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Do the loan terms match the 1920 and your Draft Authorization?
Addressed financial analysis including repayment ability from operations?
Is the request for SBA funds clearly articulated?
Have you addressed Credit Elsewhere?
Have you clearly addressed the eligibility of each note to be refinanced? (e.g. unreasonable terms, 10% savings)
Have you addressed the specific collateral that will secure the proposed loan? If so, have you done a liquidation value evaluation to determine whether the loan is fully secured?
Discussed business and management history?
How about the personal history, experience and credit history of the principals?
If repayment is based upon projections, have you addressed why they are reasonable?
Changes of Ownership – why is it good for the business? Experience of new owner, recent business trends, seller financing standby terms?
Discussion of all project costs including sources of funds. If other financing is involved, has it been addressed?
Equity injection and need for working capital
WHAT SHOULD BE COVERED IN YOUR CREDIT MEMO?
Primary Screen-Out Reasons
… AND HOW TO AVOID THEM
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The Top 5 categories account for 75% of the total Screen 2nd Quarter 2018
THE TOP FIVE CATEGORIES
25%
25%
11%
9%
6%
25% Credit Memo Incomplete
Financial Statements/Projections
1919/1920 Missing/Incomplete
Debt Refinance
Change of Ownership
Other
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NUMBER ONE…
Credit Memo Incomplete
Collateral Shortfall not addressed
Life Insurance not addressed
Derogatory credit not addressed including
Delinquent Federal Debt
Use of Proceeds Unclear
Need for Working Capital not addressed
Schedule of Collateral Missing or Incomplete
Shareholder debt not placed on standby or not addressed
Draft Authorization conflicts with Credit Memo
Notes to be refinanced not clearly identified
Justification for refinance not properly addressed (Benefit to the Borrower)
Justification for Projections not addressed
Liquidity of 20% owners, their spouses and minor children not addressed
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Financial Statements Missing/Incomplete
Affiliate financial statements missing/incomplete
Projections missing or assumptions not included
Borrower’s historical financial statements missing/incomplete
Personal Financial Statement Incomplete
Debt schedule missing/incomplete or doesn’t match balance sheet debt
Pro-forma Balance Sheet missing/incomplete
Seller financial statements missing/incomplete Make sure that current YTD Business Financials are no older than 120 days from submission to SBA
Make sure the Personal Financial Statement is no older than 90 days from submission to SBA
2ND ON THE LIST…
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3RD ON THE LIST…
Forms 1919 and 1920
Forms are missing, incomplete or unsigned
Ownership identified does not total 100%
Other SBA loans are not identified on 1920
Use of Proceeds on 1920 is incomplete or doesn’t match credit memo
Trade Name (dba) left blank when applicable on 1920
Payment Amount and Rate Adjustment Frequency missed on 1920
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4TH ON THE LIST…
Debt Refinance
Copy of Notes to be Refinanced Missing
Transcripts for Same Institution Debt Refinance Missing
Benefit to Business Not Stated
Loan to be Refinanced on Reasonable Terms Not Met
10% Improvement to Cash Flow Not Met
Same Collateral Position Required When Refinancing
Certification that Credit Card was Used for Business Purposes Missing and provide copy of most recent Credit Card statement
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5TH ON THE LIST…
Change of Ownership
Asset Purchase/Stock Purchase Agreement Missing
Equity injection not addressed/adequate
Third party Independent Business Valuation Missing/Unacceptable
Lender’s Internal Business Valuation Missing/Unacceptable
Change of Ownership Appears Ineligible
Payment to Associate
Finance amount not supported by business valuation
CHANGE OF OWNERSHIP
Change of Ownership
An asset purchase will be deemed a change of ownership and must comply with all of the Change of Ownership requirements if the Applicant(s) is purchasing all or substantially all of the assets of the Seller’s business and is continuing the operations of the Seller’s business.
Seller may not remain as an officer, director, stockholder or key employee of the business (short transitional period may be allowed)
Small business must either be the Borrower or a Co-Borrower
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Change of Ownership
Change of Ownership Between Existing Owners:
A change of ownership between existing owners may be financed under the following circumstances:
An existing owner(s) of the small business is purchasing
the ownership interest of another owner(s), resulting in 100% ownership of the business by the purchasing owner(s)
The small business is redeeming the ownership interest of an owner(s), resulting in 100% ownership of the small business by the remaining owner(s)
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“Creeping Control”
“SBA intentionally removed the prohibition on “creeping control” from the SOP with the original rewrite of the 50 10 (5) in August 2008 because as long as the remaining owners ended up with 100% of the ownership of the business, SBA did not care how it was allocated after the purchase. That was a business decision that was left up to the business owners.
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Change of Ownership
Change of Ownership
Change of Ownership Resulting in a New Owner:
A change of ownership resulting in a new owner may be financed under the following circumstances: A small business is purchasing 100% of the ownership
interest in another business
An individual(s) who is not an existing owner is purchasing 100% of the ownership interest in a small business
A small business is acquiring another small business through an asset purchase
An Employee Stock Ownership Plan (ESOP) or equivalent trust is purchasing a controlling interest (51%) in the employer.
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EQUITY INJECTION
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Start-Up At a minimum, SBA requires an equity injection (borrower contribution) of no
less than ten (10) percent of the total project costs for a start-up business.
SBA consider a business to be a “start-up” for the purpose of determining equity injection when it has been in operation (i.e., generating revenue from intended operations) for up to one year.
Total project costs include all costs required to become operational, regardless of the source of funds.
If the borrower is obtaining a term loan for working capital, it is considered part of the total project cost.
If the borrower is obtaining a separate line of credit, it is not considered part
of the total project costs. There should be adequate working capital built into the project. The separate line of credit is to be used for ongoing operations.
Equity Injection
Equity Injection
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Change of Ownership
SBA requires an equity injection of no less than 10 percent of total project costs.
Seller debt can be used to meet the injection
requirement only if it is on full standby for the life of the SBA loan and it does not exceed half of the required equity injection.
The borrower can not make interest payments on the seller debt. Full standby requires that no principal or interest payments are made.
Equity Injection
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Change of Ownership - Partner Buyout Significant changes to SOP 50 10 5(J) were made to this policy
through SBA Policy Notice 5000-17057 effective April 3, 2018.
In the event the Lender is unable to document that both (1) and (2) on the next slide are satisfied, the remaining owner(s) must contribute cash in the amount of at least 10% of the purchase price of the business, as reflected in the purchase and sale agreement.
Equity Injection
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Change of Ownership - Partner Buyout In order for a 7(a) loan to finance greater than 90% of the purchase price of a partner buyout: (1) the remaining owner(s) must certify that he/she has been actively
participating in the business operation and held the same ownership interest in the business for at least the past 24 months (Lender must include in the credit memorandum confirmation that the borrower has made the required certification and retain such certification in the loan file); and
(2) the business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership.
Equity Injection
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Partner Buyout Questions for Requirement 1: Does the certification have to be submitted to the LGPC with the
application? No, the lender must include in the credit memorandum confirmation
that the borrower has made the required certification and retain such certification in their loan file.
What if the remaining owners have change their percentage of ownership
in the past 24 months? As long as the ownership interest has increased it is acceptable. The
ownership interest cannot have decreased.
What if one remaining owner has been actively participating in the business for 24 months and one has not? All remaining owners must meet the requirement or they must
contribute cash in the amount of at least 10% of the purchase price of the business.
Equity Injection
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Partner Buyout Questions for Requirement 1: Is an interim balance sheet acceptable if it is not the
current quarter? Yes, an interim balance sheet is acceptable.
Can a real estate or equipment appraisal value be used
to calculate the debt-to-worth ratio? No, the ratio must be based on the historical
balance sheets.
Equity Injection
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Acceptable Injection Sources: Cash that is not borrowed.
Cash that is borrowed through a personal loan to the business owner with
repayment from a source other than the cash flow of the business.
Assets other than Cash - Lenders must carefully evaluate the value of assets other than cash that are injected by owners. An appraisal or other valuation by an independent third party is required if the valuation of the fixed assets is greater than the depreciated value (net book value). A valuation of the fixed assets provided as part of a business valuation will not meet these requirements.
Standby debt - Only debt that is on full standby (no payments of principal or interest for the term of the SBA guaranteed loan) may be considered as equity for SBA’s purposes. A copy of the note must be attached to the standby agreement.
Equity Injection
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Unacceptable Injection Sources: Value or cost of education
Funds that are borrowed and do not meet the exception
noted on the prior slide.
LENDER RESOURCES
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SBA.GOV
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Hover over the Lenders box and click on 7(a) Loan Program
SBA.GOV …FOR PARTNERS
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Scroll to the bottom of the page to Loan Servicing and Processing Centers
SBA.GOV …FOR PARTNERS
Sba.gov …LGPC
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SBA.GOV …LGPC
Thank You!
QUESTIONS?
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