HOW TO DOCUMENT EQUITY INJECTION GETTING IT RIGHT, 100% OF THE TIME. Coleman Webinar November 14, 2012

Transcription

1 HOW TO DOCUMENT EQUITY INJECTION GETTING IT RIGHT, 100% OF THE TIME Coleman Webinar November 14, 2012

2 Small Business Banking News of the Day Talk Show Bob and Charles Show 1:50-2:00 PM ET. We are featuring a complimentary small business lending industry discussion with Bob Coleman, Editor of the Coleman Report and Charles Green, Author of The SBA Loan Book: Bestselling book on SBA-guaranteed financing. This discussion will start at 1:50 PM ET and end at 2:00 PM ET.

3 How to Ask Questions Use Go to Meeting's chat function, you can choose to ask question in writing or verbally. If comfortable, give us your first name, name of bank, and city. Send an to

4 Panelist How to Document Equity Injection Getting it Right, 100% of the Time Lisa G. Lerner Owner, Member Enhanced Consultive Solutions, LLC ("ECS") Ms. Lerner's professional experience spans over 28 years in the financial arena, with strong expertise in Small Business Administration lending, most recently operating ECS since ECS is an agency (SBA) approved lender service provider and provides guidance, and technical support to small and mid size lenders. She and her husband, Nelson, are also certified pet therapy teams with their dogs volunteering with the nonprofit organization, Gabriel's Angels "Pets helping kids."

5 5 EQUITY INJECTION In association with COLEMAN PUBLISHING PROTECTING THE INTEGRITY OF YOUR SBA GUARANTY

6 6 What might be a WORST case scenario?

7 Avoiding a CRASH 7 SBA WILL VERY LIKELY deny the guaranty on this and other similar scenarios! SBA SOP STAY INFORMED A DEFINING YOUR PROCESS REVIEW HOW THE PROCESS WORKS Items to consider.

8 8 Business purchase with a carry back. Seller carry-back MAY be considered equity injection IF & only IF the note is on FULL standby. Attach a copy of the note to the standby/subordinatio n agreement. SUPPORT YOUR ARGUMENT IN CREDIT MEMO!

9 Full Standby 9 No interest No principal payment FULLY subordinated

10 Another note on standby debt 10 Interest only MAY be considered IF HISTORICAL BUSINESS CASH FLOW is sufficient to make payments. A recurring theme in all SBA lending discussion: Cash flow Cash flow Cash flow!

11 11 Goodwill over $500,000 in business purchase IF intangibles are over $500,000, equity injection MUST be AT LEAST 25% of the purchase price, if submitted using delegated authority (PLP, etc). If < 25%, the package must be submitted for standard processing. PRESENT A CONVINCING ARGUMENT TO SBA as the SBA loan officer must be convinced of your reasoning via your clear & complete credit memo.

12 Intangibles 12 Including but not limited to Agreements not to compete Goodwill Client/customer list Patents Copyrights Trademarks

13 13 Definition TOTAL Business Purchase Price: ALL assets being acquired!

14 14 Eligible Passive Company & Operating Company SOP version E: Eligible passive company may now be a co-borrower on one loan to include other assets for use by the OC in the purchase of a business: Prior SOP D stated there must be two loans: 1. Business purchase - OC 2. Real estate purchase - EPC

15 15 What is the right amount of equity injection? Reasonable and Prudent MUST BE CLEARLY SUPPORTED & DEFINED in the credit memo. Based on: Type of business Management Experience Competition in the market area Etc etc

16 DEFINITION 16 Early default generally defined as going south within 18 months of closing. Any issues are magnified in cases of early default!

17 SBA HERNDON liquidation center: 17 In the event of an early default: The center will look for TWO bank account statements PRIOR TO LOAN APPROVAL PLUS TWO bank account statements immediately prior to disbursement to confirm existence of the funds!

18 TO INCLUDE in ALL TRANSACTIONS 18 Let s repeat that: TWO PRE APPROVAL statements PLUS TWO PRE DISBURSEMENT statements TO VERIFY FUNDS

19 19 What is considered equity injection? WITH AN EXCEPTION under limited circumstances USE EXTREME CAUTION!

20 Specifics on this exception 20 Borrowed funds through the use of personal credit is additional debt and not equity EXCEPT if the applicant can CLEARLY demonstrate and you can show CLEAR AND CLEAN documentation that. Repayment of this personal loan WILL be made from sources OTHER than the business cash flow!

21 A side note for personal loan for equity? 21 FULL & FAST DISCLOSURE Avoid any appearance of conflict of interest SUBMIT DIRECTLY TO THE STANDARD 7a Processing center for SBA s direct approval! Credit memo must address the impact on the personal & business financials for side loans.

22 From our simple example 22 Limited management experience? Why consider this scenario at all? What are potential mitigants?

23 Reasonable and Prudent 23 FIVE C s of credit! ALWAYS worth the time to review Character (integrity) Capacity (sufficient cash flow to repay the debt) Capital (net worth) Collateral (assets to secure the debt for secondary repayment source) Conditions (of the applicant/borrower & the economy)

24 Where does equity injection fit in? 24 Aside from the fact that adherence to the SBA requirements save your guaranty. Equity injection assures your borrower of having some skin in the game something at risk

25 25 Another recurring theme! REASONABLE & PRUDENT! REASONABLE & PRUDENT

26 LET THE SOP BE YOUR GUIDE 26 Keep current with changes that occur before new SOP s issued.

27 What does Equity Injection look like? 27 THREE URGENT AND IMPORTANT KEY POINTS: HOW? NUMBER ONE: Copy of the remittance (check-front and back, wire, other) that was PROCESSED showing the funds were moved into the borrower s account or escrow.

28 28 More.. Number two: Confirming funds were available from said SOURCE COPY OF STATEMENTS of the account from which the funds are being withdrawn for EACH of the 2 (2 pre approval and 2 pre disbursement!) most RECENT months showing funds were available!

29 29..more Thirdly: DESTINATION the borrower! Where did the funds END UP? A statement of the borrower s account shoring the funds deposited or a copy of an escrow settlement statement showing USE of the injection.

30 30 Title or escrow company SETTLEMENT STATEMENT. Equity injection can be found in earnest month deposit(s) PRE AUDIT SETTLEMENT statement defines the $ amount that the borrower needs to bring to closing. REVIEW CAREFULLY just as you would in commercial transaction.

31 What if funds given as a GIFT? 31 YOU MUST HAVE PROOF! that funds do not need to be repaid: a gift letter PLUS the three key items (Reference: page 188 of the current SOP) HOW funds were provided (front and back of a PROCESSED check, wire etc.) SOURCE from where DESTINATION - borrower

32 Assets other than cash. 32 EVALUATION OF THESE ASSETS IS KEY! SOP reference page 187 A potential SLIPPERLY SLOPE

33 More on Assets other than cash 33 Appraisal or other valuation by an independent third party is REQUIRED IF valuation of the fixed assets > than the net book value. ** A valuation of the fixed assets provided as a part of a business valuation will NOT meet these requirements UNLESS a part of a going concern appraisal!!!

34 Going concern appraisal may be acceptable IF: 34 Reference SOP page 195 Loan proceeds will be used to purchase a special use property Appraisal performed by an appraiser EXPERIENCED in the industry. Appraisal allocates SEPARATE values to the transaction components.

35 What about EXPRESS loans? 35 PERSONAL RESOURCES TEST applies in Express loan. Equity may be required. Reference SOP pages 41 SOP & 104 Use the same criteria as your conventional loans. A reminder to apply the personal resources rule/test for any owner of 20% or more.

36 36 WHEN to require completed equity injection documentation.. THE EARLIER the BETTER! NO FUNDS CAN BE DISBURSED UNTIL COMPLETE AND ADEQUATE PROOF OF ANY REQUIRED EQUITY INJECTION.

37 WHEN continued.. 37 Set expectations with borrower as soon as possible! SOP states that equity injection must be verified prior to disbursing loan proceeds and must maintain evidence in loan files. page 188. VERIFY BEFORE OR AT CLOSING to eliminate potential problems!

38 38 ALL those who touch each file should ask: does this information make sense? Loan Closing Officers hold a KEY ROLE in protecting the guaranty!!

39 39 Creditworthiness! SOP reference page 180 Key points to cover in the credit analysis Including determination if the equity and the pro forma debt to worth are acceptable based on the type of business, management experience and the economic conditions in the area.

40 Clarity in the credit analysis 40 The memo must clearly explain and support the amount of equity injection required. Fully detailed discussion and complete argument and explanation for the amount of equity injection required in the credit analysis!

41 41 Discussion of the this topic on process Set expectations for your borrowers up front. INTEGRATE this REQUIREMENT into your process for each loan. Review credit memo requirement for equity. Assemble required documents Review IMMEDIATELY all information received REVIEW again in preparation for closing. INCLUDE IN ALL OF YOUR CHECKLISTS & PROCEDURES

42 Post closing review 42 ALL SHOULD BE VERIFIED AT OR BEFORE CLOSING. If equity injection verification is not complete at closing, particularly if funds have been disbursed, your leverage is likely GONE! You may have made a loan without a guaranty that you not have made without a guaranty.

43 43 KEY POINTS for PROOF PROOF of SOURCE is always required. PROOF PROOF 1. Copy of check or wire transfer with evidence showing the funds were deposited into the borrower s account or escrow 2. Copies of statements of accounts from which funds are withdrawn showing funds available. 3. Subsequent statements showing funds deposited.

44 EQUITY INJECTION EQUITY INJECTION 44 Reasonable and prudent PROOF and SOURCE of funds must be included!! Reasonable and prudent Do the funds have a mother and a father??? Incomplete documentation WILL JEAPARDIZE THE guaranty!

45 45 MAKE A HABIT TO REVIEW at periodic intervals review issues and process request feedback as to what is working and why.

46 Resources abound SBA Processing center, SBA District offices, other lenders, Lender Service Providers, SBA website, etc etc option to SBA for questions:

47 Keep an EYE OUT for inconsistencies 47 TRUST BUT VERIFY! Avoid potential fraud wherever possible!

48 Thank you for tuning in 48 Lisa G. Lerner, Enhanced Consultive Solutions, LLC Helping you achieve your SBA lending goals Loan Administration/Expertise in SBA Lending In association with COLEMAN PUBLISHING, INC.

49 49 Keep the balance, breathe & have fun!