Intro to 7(a) Lending

Transcription

1 Intro to 7(a) Lending Presented by Dianna Seaborn Acting Director, Office of Financial Assistance US Small Business Administration 1

2 Becoming an SBA Lender Credit Unions with share insurance must send a written request to the SBA field office in the area where its principal office is located. The request must include a written statement that to the best of its knowledge, the lender has satisfactory: i) financial condition (e.g., capital and liquidity); ii) small business credit administration policies, procedures, and practices to which it adheres to in its operations; and iii) small business servicing policies, procedures, and practices that it continues to adhere to in its operations. Locations of District Offices can be found at SBA District Offices 2

3 Becoming an SBA Lender SBA District Office will review your information, and provide an SBA Form 750 agreement for execution This master agreement establishes your lending relationship with the SBA as a deferred participation lender; establishes basic rules Once the signed and attested 750 Agreement is received by Office of Financial Assistance, you may begin submitting applications to SBA for guarantees on member business loans 3

4 Credit Union Partnership with SBA The National Credit Union Administration (NCUA) and SBA support increasing the awareness of financing small businesses, especially underserved borrowers. The SBA guaranty, backed by the full faith and credit of the Federal government, lowers loss reserve requirements for lenders. 4

5 SBA Benefits to Credit Unions Additional service to retain members New streams of income (interest & servicing) Loan terms longer than regulatory limitations New products to generate new members Risk is mitigated Increased portfolio size Sale Premium (Secondary Market) Product cross sales 5

6 SBA 7(a) Business Loans SBA s primary financing program, 7(a) loans can be used for most business expenses, including: Purchase machinery, equipment, fixtures, buildings and land for business use Expand or renovate facilities Construct commercial buildings Finance receivables and augment working capital Refinance eligible business debt Finance eligible change of ownership/purchase of a business 6

7 SBA 7(a) Business Loans SBA guarantees up to 85% on loans up to $150K, and up to 75% on all other loans of loan value up to $5M Magnitude: In 2014, SBA guaranteed $19.2 billion, an all-time record amount, through the 7(a) program the primary way SBA delivers credit small businesses 7

8 Eligibility for SBA Loans To be eligible for an SBA business loan, a small business applicant must: 1) Be an operating business 2) Organized for profit 3) Located in the United States 4) Be small based on regulatory size requirements (13 CFR Part 121) 5) Demonstrate a need for the desired credit 8

9 Financing-What does SBA look for? 1. Owners and operators w/ good credit & character. 2. Feasible business plan. 3. Management expertise and commitment necessary for success. 4. Sufficient funds, including SBA guaranteed loan, to operate the business on a sound financial basis. 5. Adequate equity investment in the business. 6. Sufficient collateral, however, SBA is a cash flow lender and not a collateral lender. 7. Ability to repay the loan on time from the projected operating cash flow. 9

10 Why Do Lenders Use the SBA Guaranty? Longer maturities are needed Collateral may be inadequate to meet normal underwriting Start-up or certain types of businesses Business leverage Lender s legal or policy limit Minimize risk- reduces risk reserve 10

11 General SBA Credit Standards Ability to repay the loan from historical or projected operating cash flow Sufficient cash flow to operate on a sound financial basis Adequate owner equity investment Feasible business plan Management expertise and commitment necessary for success Pledge of available collateral (if required) 11

12 SBA Credit Score Small Loan Strategy The 7(a) loan guaranty program provides guarantees to lenders for general purpose loans to small businesses SBA and lenders can use business credit scoring to streamline the application process for loans of $350,000 or less, which should reduce the costs to lenders of making small loans & encourage them to engage with smaller and under-served business customers. 12

13 7a Small Loans 13

14 7(a) Small Loan Terms and Rates 7(a) Small Loans Program Details Maximum loan amount $350,000 85% guarantee on loans up to $150,000 75% guarantee on loans over $150,000 Credit Scoring availability with streamlined paperwork Term loan only -lines of credit are not eligible 7(a) Loan Program Maturities & Interest Rates 5-10 years for working capital, machinery, equipment Up to 25 years for real estate, construction Prime % for loans of 7 years or less Prime % for loans over 7 years Rates can be higher for smaller loans 7(a) Program Guarantee Fees 2% on loans up to $150,000 * 3% on loans $150,001 - $700, % on loans $700,001 - $ 1 million 3.75% on loans > $1 million Annual lender service fee 14

15 Benefits of 7(a) Small Loans Term loans for less than $350,000 Simple Process: Requires use of SBA s Business Credit Scoring Simplified, abbreviated underwriting Lenders are not required to take collateral for loans up to $25,000 Loans can be sold on the secondary market 15

16 SBA 7(a) Small Loan SBA s Credit Score successfully and accurately predicts risk 16

17 SBAExpress Loans 17

18 SBAExpress Loan Terms and Rates SBAExpress Loans Program Details Maximum loan amount $350,000 50% guarantee Follows lenders own underwriting policies Term, line of credit or credit card No collateral needed for loans up to $25,000 and lenders follow their own policy for loans over $25,000 SBAExpress Loans Maturities & Interest Rates 5-10 years for working capital, machinery, equipment Up to 25 years for real estate, construction 7 years maximum term on lines of credit Prime + 6.5% for loans under $50,000 Prime + 4.5% for loans over $50,000 SBAExpress Loans Guarantee Fees 2% on loans up to $150,000* 3% on loans $150,001 - $350,000 Veterans receive 0% fees on SBA Express loans up to $350,

19 Benefits of SBAExpress Loans Follows lenders own underwriting policies 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. Loans can be sold on the secondary market 19

20 2015 Fee Relief for Small Loans For 7(a) loans $150,000 or less approved in FY2015: BOTH the up-front Guaranty Fee and the On-going Annual Service Fee are zero. Guaranty Fees for SBA Veterans Advantage in FY2015: 1. The up-front guaranty fee on SBA Express loans of $150,001 to $350,000 approved to Veteran small businesses will continue to be 0% (no reduction in annual service fees on loans over $150K) 2. The up-front guaranty fee for non-sba Express 7(a) loans of $150,001 up to and including $5,000,000 approved to Veteran small businesses will be reduced by 50% (no reduction in annual service fees on loans over $150K) 20

21 Other Resources District Offices Lender Relationship Specialists (LRS s) can answer questions, provide additional information, training, guidance on loan eligibility and credit issues all at no cost. To contact your District Office SBA District Offices Visit our Website at or call

22 Other Resources Additional resources that may provide relevant services to lenders, including Credit Unions: National Credit Union Administration(NCUA) small business lending resource page offers additional guidance. sources.aspx Credit Union Service Organizations (CUSOs) Can provide cost effective support for business loan activity during ramp ups or as permanent service providers 22

23 SBA References Code of Federal Regulations (CFR): CFR Title 13, Parts 120 and 121 Standard Operating Procedures (SOP) : SOP (H) SBA Lender Resources: SBA Forms, SOP, Notices, and Loan Packages: Franchise Reviews/Questions: or franchise@sba.gov 23

24 Upcoming Roundtables in SBA Lending Series 7(a) Loan Program July 23 International Trade Loans August Loan Program September 24 Problem Solving/User Experience - TBD 24