Complimentary Coleman Report Live!

Transcription

1 Complimentary Coleman Report Live! Featuring Bob Coleman & Charles Green 1:50-2:00 PM E.T. Log on 10 minutes early before every Coleman webinar for a briefing on issues vital to the small business lending industry with your hosts: Bob Coleman, Editor of the Coleman Report Charles Green, Director, Small Business Finance Institute 1

2 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 2

3 Certificates of Participation All Coleman Webinar attendees will receive a certificate of participation. This documents your continuing education history for your regulators. Also, this documents the answer for SBA s Review question of continuing staff education. We will automatically forward a certificate of participation for those who are registered to attend the webinar via GoToWebinar. If you have purchased the unlimited site license and would like certificates for all who attend simply forward their names and addresses to jeanne@colemanreport.com. She will the certificates to all attendees. 3

4 Panelist Gary E. Griffin President & CEO Capital Growth Solutions, LLC Gary Griffin has been President and CEO of Capital Growth Solutions, LLC, one of the original Loan Service Providers, since May of 2008, concentrating in the areas of Servicing and Liquidation. Mr. Griffin has been involved in all aspects of SBA lending for the past 34 years, beginning with liquidation of SBA Disaster Loans in the Jacksonville District Office of SBA. He has received numerous awards and allocates from the SBA and the Banking industry, including Financial Services Advocate of the Year (Tennessee) and being a NAGGL board member representing small banks. He is a CPA in both Tennessee and Georgia (inactive) and has served as Eastern Regional Vice President of Bank of the West, BDO for The Money Store in Tennessee, Georgia, North and South Carolina and President of Community Financial Corporation, a wholly owned subsidiary of First Volunteer Bank, Tennessee s largest SBA lender for 10 years. He conducts numerous seminars nationally for the SBA and Lender Organizations on Servicing and Liquidation. 4

5 SBA 7(a) Program Changes to the SOP 5010 Effective January 1st December 18, 2013 By Bob Coleman Editor Coleman Report 5

6 Overview Loans Less than $350,000 Loans More than $350,000 Eligibility Stuff you don't need to know 6

7 oans Less than $350,000 1) Follow your internal policies. 2) SLA Score 3) Credit Memo 4) Cash Flow 5) 6 Month Failure Test 6) ) Collateral 7

8 oans Less than $350,000 For all loans up to and including $350,000, lenders will follow SLA credit analysis requirements with refined guidance concerning debt service coverage and clarification concerning financial statement verification; 8

9 oans Less than $350,000 Lenders Credit Memorandum Must Include All of the Following: Positive Cash Flow Description of the history of the business Depth of management experience debt service coverage ratio exceeds 1:1 on a historical or projected cash flow basis global cash flow coverage ratio exceeds 1:1 on a historical basis or, projected cash flow basis. Lender must document in the loan file the definition or formula used to calculate global cash flow Owner/Guarantor analysis, including personal financial statements, consistent with lender s similarly-sized non-sba guaranteed commercial loans. Lenders may use their own credit scoring criteria 9

10 oans Less than $350,000 Determine creditworthiness such as the probability of an account reaching 90 days past due in the next 6 months Lenders must analyze the strength of the business including key characteristics of the account such as: Internal Credit/Deposit behavior data Current consumer credit bureau data Small Business Financial Exchange data 10

11 oans Less than $350,000 This may be conducted using a risk management or credit scoring model if the lender uses such a model to review its similarly-sized, non-sba guaranteed commercial loans. If the lender does not have this ability to systematically analyze the borrower, the lender must collect and analyze business tax returns. 11

12 oans Less than $350,000 Lenders must verify and reconcile the applicant s financial data against income tax data prior to submitting an SLA application by submitting IRS Form 4506-T, Lender must determine if the equity and the pro-forma debt-toworth 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. 12

13 oans Less than $350,000 Collateral For loans of $25,000 or less, lenders are not required to take collateral; For loans over $25,000, up to and including $350,000, the lender must follow the collateral policies and procedures that it has established and implemented for its similarly-sized non- SBA-guaranteed commercial loans, but at a minimum the lender must obtain a lien on the applicant s fixed assets to secure the loan. 13

14 ecap: Loans Less than 350,000 1) Follow your internal policies. 2) SLA Score 3) Credit Memo 4) Cash Flow 5) 6 Month Failure Test 6) ) Collateral 14

15 oans More than $350,000 1) Positive Cash Flow 2) Positive Global Cash Flow 3) Enhanced Credit Memo 4) Projections Analysis 5) New Collateral Requirements 15

16 oans More than $350,000 For loans over $350,000 up to and including $5,000,000, the SOP provides a definition of how SBA calculates business cash flow to determine repayment ability: Operating cash flow is defined as earnings before interest, taxes, depreciation, amortization (EBITDA); Additions and subtractions to cash flow analysis defined; and Minimum debt service coverage ratio of 1.15 to 1. 16

17 oans More than $350,000 Requirements of loans less than $350k must be met and additional analysis must be performed Lender s credit decision must consider the length of time in business under current management and, if applicable, the depth of management experience in this industry or a related industry. Such analysis should include a brief description of the management team of the company. A financial analysis of repayment ability based on historical financial statements (including balance sheet with debt schedule and income statement) and/or tax returns (if an existing business) and detailed projections, including the supporting assumptions: 17

18 oans More than $350,000 Analysis of historical cash flow should demonstrate total debt service coverage after the SBA loan; Define operating cash flow (OCF) as earnings before interest, taxes, depreciation and amortization (EBITDA); 18

19 oans More than $350,000 Analysis must document additions and subtractions to cash flow such as the following: (a) Unfunded capital expenditures; (b) Non-recurring income; (c) Expenses and distributions; (d) Distributions for S-Corp taxes; (e) Rent payments; (f) Owner s Draw; and/or (g) Assessment of impact on cash flow to/from any affiliate business. 19

20 oans More than $350,000 Debt service (DS) is defined as required principal and interest payments on all business debt inclusive of new SBA loan proceeds. 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: 20

21 oans More than $350,000 For projected cash flows, the Lender should provide the calculation of debt service coverage using the definitions above, and provide analysis of the assumptions supporting the projected cash flow, such as: i. Reason for reduced expense structure; ii. Reason for revenue growth, i.e. (a) new product lines, (b) sales channels, and (c) production facilities, and iii. Industry analysis. 21

22 oans More than $350,000 Spread of pro-forma Business Balance Sheet Current Ratio, Debt/Tangible Net Worth, Debt Service Coverage, and other ratios the lender considers significant for the business/industry (e.g., inventory turnover, receivables turnover, and payables turnover, etc.); Analysis of working capital adequacy to support projected sales growth in next 12 months; Collateral adequacy assessment (using net book value) to offset risk of default 22

23 oans More than $350,000 Explanation of and justification for the refinancing of any debts as part of the loan request, particularly Same Institution Debt (SID), along with a transcript of the account for the prior 24 months except for SID which requires a transcript of the account for the prior 36 months or the life of the loan, whichever is less. 23

24 oans More than $350,000 Conduct analysis of credit, including lender s rationale for recommending approval; Discussion and analysis of any: 1. Competition 2. Seller financing; 3. Stand-by agreements; day delinquencies; 5. Trade disputes and/or; 6. Federal, State or local citations which would preclude the small business applicant from normal business operations. 24

25 oans More than $350,000 Lender must review the franchise agreement and all related documents including the franchise disclosure document and any credit information provided as the number of failed franchisees and cash flow projections provided by the franchisor. 25

26 oans More than $350,000 Collateral SBA considers a loan as fully secured if the lender has taken security interests in all available fixed assets with a combined net book value as adjusted below up to the loan amount. 26

27 oans More than $350,000 For collateral purposes, adjusted Net Book Value is determined as follows: new machinery and equipment may be valued at 75% of Net Book Value, or 80% with an Orderly Liquidation Appraisal, minus any prior liens; used or existing machinery and equipment may be valued at 50% of Net Book Value or 80% with an Orderly Liquidation Appraisal, minus any prior liens; and real estate may be valued at 85% of the appraised value. 27

28 oans More than $350,000 If there is a collateral shortfall (not fully secured), the lender may include trading assets as necessary (using 10% of current book value for the calculation) and will be required to take available equity in the personal real estate of the principals. A non-owner spouse is not required to pledge collateral that is held solely in their name providing there was no transfer of assets within 6 months of the application date. 28

29 oans More than $350,000 Appraisals When SBA policy requires an appraisal of real estate, federally regulated lenders may follow FIRREA standards for appraisals with the following qualifications: Appraisals must not be dated more than 12 months prior to the date of application; Federally regulated lenders still must comply with SBA requirements for appraisals of fixed assets and the additional appraisal requirements when there is a change of ownership 29

30 oans More than $350,000 Appraisals Check the SOP for specific designations of qualified appraisers and business valuation experts 30

31 oans More than $350,000 Life Insurance Follow your internal polices. However, if the loan is not fully secured life insurance is required, unless the applicant is uninsurable. 31

32 ecap: Loans More than 350,000 1) Positive Cash Flow 2) Positive Global Cash Flow 3) Enhanced Credit Memo 4) Projections Analysis 5) New Collateral Requirements 32

33 ligibility 1) Debarred Agents 2) Franchise Agreement 3) Form

34 ligibility Lenders must determine if an employee or agent is disbarred 34

35 ligibility Franchise Agreement Review Updated guidance is provided on the eligibility of franchise, license, dealer, jobber or similar agreements, including among other things: Delegated lenders will have the option of submitting such agreements to SBA for an affiliation determination; Clarification is provided on fitness centers that target one gender; Franchisors may appeal the decision by SBA not to approve their agreement for inclusion on the Registry by following the procedures set out in the SOP; and Franchise appeals involving businesses that may be engaged in promoting religion or that may have activities of a prurient nature may be referred to the Associate General Counsel for Litigation for a decision. 35

36 ligibility Businesses engaged in promoting religion must complete SBA Form 1971 Updated guidance is provided regarding the eligibility determination for a business that may be connected, associated or affiliated with a religious organization or may have a religious component. In such instances, lenders must complete the Religious Eligibility Worksheet (SBA Form 1971), which is now included in SOP as Appendix 8 (rather than in SOP , Legal Responsibilities). Additional guidance is provided depending on whether the application will be processed under delegated or non-delegated processing. 36

37 ligibility A Delegated lender or SBA Field Office Cannot Clear Felony Arrests or Convictions for Loan Processing. 37

38 ligibility SBA form 912 Delegated lenders will now be permitted to clear certain forms for processing 38

39 ligibility Statement of Personal History Questions 7,8,9 39

40 ligibility Businesses Providing Prurient Sexual Material May not be eligible 40

41 Recap: Eligibility 1) Debarred Agents 2) Franchise Agreement 3) Form

42 tuff You Don't Need To Know NFRL (Non-federally regulated lenders) must have internal control similar to those set forth for SBLC's 42

43 tuff You Don't Need To Know SBLCs Specific guidance for SBLCs has been added, including: SBLCs must submit to the Director of the Office of Credit Risk Management (D/OCRM) for review and approval, a credit policy demonstrating compliance with SBA regulations and SOPs. SBLCs must submit to the D/OCRM for review and approval, annual validation documentation demonstrating that all scoring models used are predictive of loan performance. Each SBLC s Board of Directors must adopt and fully implement an internal control policy satisfactory to SBA. Additional guidance on internal control policies is provided. Wherever the SOP indicates that lenders are to follow their loan policies and procedures for their similarly-sized, non-sba guaranteed commercial loans, SBLCs must follow the policies and procedures reviewed and approved by SBA 43

44 tuff You Don't Need To Know CDC Corporate Governance Becoming a CDC CDC Decertification Premier certified lender program Multi-state application 44

45 tuff You Don't Need To Know Adapts a universal set of forms for all 7(a) lending, including standard 7(a), SBA Express and all pilot programs (Forms 1919/1920) Requires that business financials be dated within 180 days of submission to SBA Requires personal financial statements be dated within 90 days of submission to SBA Requires all applications, and 1502 reports to be submitted to SBA electronically Lenders may use their own documentation 45

46 Recap: Loans Less than $350,000 1) Follow your internal policies. 2) SLA Score 3) Credit Memo 4) Cash Flow 5) 6 Month Failure Test 6) ) Collateral 46

47 Recap: Loans More than $350,000 1) Positive Cash Flow 2) Positive Global Cash Flow 3) Enhanced Credit Memo 4) Projections Analysis 5) New Collateral Requirements 47

48 Recap: Eligibility 1) Debarred Agents 2) Franchise Agreement 3) Form

49 Questions? Bob Coleman Editor, Coleman Report (818) (direct) 49