Topics for this Session

Transcription

1 welcome Topics for this Session Quick discussion of SBA s debt refinancing requirements Walk through of some refinancing scenarios 2 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 1

2 Why is SBA So Concerned About Debt Refinancing? Primary reason: credit elsewhere mandate in SBA s legislation No financial assistance shall be extended pursuant to this subsection if the applicant can obtain credit elsewhere [Small Business Act, Sec. 7(a)(1)(A)] So, SBA can guarantee a loan ONLY if the borrower can t get the funding from another source Dilemma: if the borrower already has a loan, doesn t that mean that credit was available elsewhere? It sounds as if it would mean that, but... 3 How Does SBA Justify Guaranteeing Loans That Refinance Existing Debt? Refinancing is limited to debts that are not currently on reasonable terms 4 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 2

3 What Debts Does SBA Consider as Potentially Eligible for Refinancing? ** Loans that involve a demand note or balloon payment Debt with a high interest rate Credit card debt used for business purposes Loans that are over-collateralized Revolving LOCs when original lender unwilling to renew or applicant is restructuring Loans with inappropriate maturity, e.g., a 3-year term loan that financed equipment with a 15 year useful life... 5(I), p What Debts Does SBA Consider as Potentially Eligible for Refinancing? (cont) ** Debt used to finance a change of ownership Special requirements (discussed later) apply if debt owed to a financial institution or debt is seller take-back financing Debt not listed that lender believes no longer meets needs of applicant But, when this is the justification, loan must be processed through LPGC 6 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 3

4 Special Requirements if Refinancing Debt Used in Change of Ownership ** If debt owed to a financial institution Delegated processing may not be used until 6 months after change of ownership If debt owed to seller of business Seller note must have been in place AND payments must have been current for at least 24 months Notes on full stand-by cannot be refinanced interest only payments are acceptable Requirement applies even if loan being refinanced was not made under 7(a) and/or seller take-back was not considered as part/all of equity injection in transaction 5(I), p Can Every Business Loan be Refinanced? ** No, there are several basic eligibility requirements Loan must be treated as a debt of the business Loan proceeds must have been used by the business for a business purpose AND... 8 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 4

5 Can Every Business Loan be Refinanced? (cont) The loan must have been eligible for 7(a) financing when it was made OR must now be eligible SBA guaranteed loan proceeds may not be used to refinance debt originally used to finance a loan purpose that would have been ineligible for SBA financing at the time it was originally made unless the condition that would have made the loan ineligible no longer exists 5(I), p What Does SBA Mean When It Says the Debt Must be a Debt of the Business? Debt reflected on the applicant s business balance sheet may be eligible if it has been reported on the applicant s business tax returns showing the interest expense associated with the debt In other words... the business must regard the loan and treat it as a debt of the business 10 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 5

6 How Do I Prove That the Debt was a Debt of the Business? If debt to be refinanced was first extension of credit Lender must obtain documentation to show that the proceeds were used exclusively for the applicant business and not used for any ineligible purpose BUT what if the debt being refinanced was previously refinanced? Can I Refinance a Debt That was Previously Refinanced? Yes, and the restrictions have been softened, but Debt must be shown on business tax returns AND Borrower must certify that the debt was used exclusively for the applicant business and not used for any ineligible purpose 12 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 6

7 Can I Ever Refinance Debt in a Personal Name? If debt in a personal name (including HELOC) applicant must Certify that the amount being refinanced was used exclusively for business purposes and Provide appropriate documentation (e.g., copy of note and/or current loan statement) to demonstrate debt was used for business purposes 13 Special Requirements for Refinancing Credit Card Debt ** ONLY business charges on credit cards may be refinanced applicant certification required Easiest if credit card is in the business name You must verify that card in business name and applicant must certify card used only for business purposes Any charges for personal uses must be deducted from credit card balance and cannot be refinanced with 7(a) If credit card in personal name Applicant must certify business use AND You must obtain supporting documentation (credit card statements and receipts describing the charge) for all charges over $250 5(I), p Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 7

8 What Do I Need to Address in My Credit Memo when Refinancing? SBA provides a list of questions that must be answered Why was debt incurred? Has over-obligated or imprudent borrower necessitated a major restructuring of the debt? Is debt currently on reasonable terms? How will new loan improve applicant s financial condition? If credit card debt, what business purpose?... 5(I), pp Credit Memo Must Address (cont) Does refinancing include payments to creditors in a position to sustain a loss either because of inadequate collateral position or low or deficit net worth? Would the lender/sba be likely to sustain part or all of the same loss by refinancing the debt or will additional collateral or altered terms protect? What portion of the total loan is refinancing? Also, for some refinancings, lender must address whether sufficient cash flow improvement Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 8

9 Cash Flow Improvement Test ** With some exceptions new installment amount must be at least 10% less than the existing installment amount(s) Improvement is in the aggregate NOT required of each debt May count debt being refinanced by source other than 7(a) Excluded from cash flow improvement requirement Long-term debt structured with a demand note or balloon payment NO cash flow improvement required Credit card debt NO cash flow improvement required Revolving lines of credit (short- or long-term) NO cash flow improvement required 5(I), p Can I Refinance My Institution s Debt? Generally allowed when all other refinancing criteria are met Lender MUST provide a transcript of the loan showing due dates and when payments received AND MUST explain any late payments and late charges occurring during last 36 months Late = payment not made within 29 days of due date CANNOT refinance when there is an appearance that the lender will shift to SBA all or part of a potential loss from that same debt CANNOT process via PLP unless loan is a bridge loan 5(I), p Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 9

10 Bridge/Interim Loans PLP processing okay if: Debt is interim loan made for other than real estate construction purposes and loan approved by lender within 90 days before issuance of PLP loan number OR Debt is a construction loan that has not been disbursed If non-plp processing, lender may make interim advances only AFTER loan authorization is issued and only if disbursements reasonably compliant with loan authorization IF SBA has NOT yet approved loan considered same institution refinancing, NOT bridge loan Bridge/interim loans are made at lender s risk! 5(I), pp. 108, May I Refinance an SBA-Guaranteed Loan? Yes, but refinancing must meet general requirements AND Either you or borrower must provide evidence from current lender that it has declined to approve an increase or a second loan and is unwilling or unable to modify current payment schedule If SAME INSTITUTION SBA debt: Only eligible if loan sold on secondary market and investor will not agree to necessary modification Cannot be processed PLP... 5(I), p Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 10

11 Refinancing an SBA-Guaranteed Loan (cont) WARNING PITFALL: VERY difficult to find that an existing SBA loan is not on reasonable terms 21 Can I Refinance a 504 Loan? It depends... refinancing is permitted if all refinancing conditions are met AND Both the 504 loan and the 3rd party (1st mortgage) loan are being refinanced OR The 3rd party loan has been paid in full and refinancing of the 504 loan is needed as part of a larger transaction to expand or renovate the project property Standard 504 prepayment penalties apply AND Lender must explain justification of refinancing in file Note: problem is that debt being refinanced can t be on reasonable terms difficult to prove in case of 504 Non-delegated processing required 5(I), pp Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 11

12 Are There Any Other Refinancing Requirements? YES... Generally at a minimum, collateral on new loan must be the same as loan being refinanced SBA may permit substitution of collateral of equal value Loan authorization must include: Itemization of all debts of $10,000 or more being repaid Any existing SBA debt must be identified by loan # and dollar amount Transcripts required If same institution for past 36 months including explanations of any late payments 23 With the caveat that every loan is different and that you must always look at the individual circumstances of each application Let s examine a few scenarios Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 12

13 Scenario 1 Applicant wants to refinance existing term loan made five years ago to purchase commercial real estate as an investment Two years ago, the business moved its operations into the building Eligible? 25 Scenario 1 Analysis Eligible?... YES (assuming all other refinancing criteria are met) SBA refinancing eligible because The condition that would have made the loan ineligible when it originally made has been corrected 26 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 13

14 Scenario 2 Applicant wants to refinance a term loan made five years ago to purchase commercial real estate that was purchases as an investment Part of the loan proceeds went to renovate the building and the business is now using 51% of the rentable property and only leasing out 49% Eligible? 27 Scenario 2 Analysis Eligible?... NO SBA refinancing not eligible because The purpose of the loan included an ineligible purpose (renovations of leased space) that cannot be corrected 28 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 14

15 Scenario 3 Applicant wants to refinance existing term loan made five years ago to purchase commercial real estate as an investment Business is continuing to lease out 100% of the building, but has plans to move into it soon Eligible? 29 Scenario 3 Analysis Eligible?... NO SBA refinancing not eligible because Original purpose of loan remains ineligible 30 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 15

16 Scenario 4 Applicant (Hotel 1) owned by Tom and Sue Smith (spouses) wants to refinance a loan that was used for two purposes To refinance the loan that purchased the building owned by Hotel 1, and To provide cash out of that transaction that was used to purchase Hotel 2 owned by Tom and Tim Smith (brothers) Eligible? 31 Scenario 4 Analysis Eligible?... NO SBA refinancing not eligible because Loan not eligible for 7(a) when originally made loan proceeds must have been used by applicant business Here, part of loan proceeds went to buy a different business with a different ownership structure REMINDER: when refinancing a previously refinanced debt SBA requires applicant to certify that debt was used exclusively for the applicant business Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 16

17 Scenario 5 Applicant wants to refinance existing SBA term loan made by another lender that provided working capital Loan is fully amortized over 4 years borrower has been paying as agreed Fixed rate of 5.6% Secured with a blanket lien on business assets Overall 10% cash flow improvement Eligible? 33 Eligible?... probably NOT Scenario 5 Analysis SBA refinancing probably not eligible because VERY difficult to find that an existing SBA loan is not on reasonable terms Even though SBA permits a loan for W/C to have a term as long as 10 years, it requires that the term be set based on the applicant s repayment ability In this example, since the borrower had been making its payments on time, we would have to assume that the term was appropriate 34 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 17

18 Scenario 6 Applicant wants to refinance an existing term loan made two years ago with the business owner as the sole borrower Proceeds of the loan were used to purchase equipment for the business Loan has a balloon payment that will come due this year Business owner has made all payments as agreed Debt is not shown on business balance sheet or business tax return Eligible? 35 Scenario 6 Analysis Eligible?... probably NOT SBA refinancing probably not eligible because SBA requires that a loan have been treated as a business debt in this scenario, it has not been treated that way 36 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 18

19 Scenario 7 Applicant wants to refinance an existing seller take-back note made last year for the purpose of purchasing the business Note fully amortizing with P&I payments timely made since inception Eligible for 7(a) financing? 37 Eligible?... NO Scenario 7 Analysis ** SBA refinancing not eligible because SOP specifically prohibits refinancing seller take-back debt during first 24 months (page 113) Fact that P&I payments have been made not relevant Now, assume loan is more than 24 months old, and applicant has been making timely interest-only payments as due under the note Eligible?... YES the loan meets the 24 months test and payments (interest-only are allowed) were timely made 38 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 19

20 Scenario 8 ** Applicant, a real estate holding company, wants to refinance a conventional loan that it used to purchase real estate that it leases to a related small business that fully occupies the property and uses it for its business operations Loan had an original maturity of 15 years with a 30 year amortization Payments have been made as agreed and the balloon payment will be due in 12 months Eligible? 39 Scenario 8 Analysis ** Eligible?... YES (assuming all other refinancing criteria are met) SBA refinancing appears eligible because Even though a holding company would be ineligible on its own (passive business), the loan could be made with an EPC/OC structure SBA permits the refinancing when loan used for purpose that would have been EPC/OC-eligible OC would be required to be co-borrower or full guarantor and all other EPC/OC conditions would apply 40 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 20

21 Final Reminder... SBA requires that ALL refinancing elements be present Type of debt must be eligible for refinancing AND Must NOT currently be on reasonable terms AND Must meet 10% cash flow improvement when required 41 Questions? 42 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 21

22 Not Yet a NAGGL Member? NAGGL is THE VOICE of the 7(a) industry with the SBA, the Administration and the Congress NAGGL offers its members a full range of services including up-to-the-minute information and training Visit to see what we have to offer us at info@naggl.org to learn more about the services that NAGGL provides to its members and the availability of a trial membership 43 Copyright 2017, NAGGL, Inc. - Do Not Copy/Distribute 22