SEED lender training 4/3/14 - Overview ppt

1. U.S. Small Business
Administration
SEED lender training 4-3-14

2. # 3 in 7a loans (3/21/14)
LOS ANGELES DISTRICT OFFICE 884
MICHIGAN DISTRICT OFFICE 864
MASSACHUSETTS DISTRICT OFFICE 814
LOS ANGELES DISTRICT OFFICE 153
ILLINOIS DISTRICT OFFICE 140
SOUTH FLORIDA DISTRICT OFFICE 133
MINNESOTA DISTRICT OFFICE 108
SANTA ANA DISTRICT OFFICE 103
MICHIGAN DISTRICT OFFICE 102
SAN FRANCISCO DISTRICT OFFICE 100
MASSACHUSETTS DISTRICT OFFICE 95

3. # 3 overall (7a & 504 combined) 3/21/14
LOS ANGELES DISTRICT OFFICE 1,037
MICHIGAN DISTRICT OFFICE 966
MASSACHUSETTS DISTRICT OFFICE 909
As of 3/21/14 # 1 in loans $150,000 and less!
MASSACHUSETTS DISTRICT
OFFICE 283
LOS ANGELES DISTRICT OFFICE 271
NEW YORK DISTRICT OFFICE 237

4. Break Out of MA lending by units, (3/21/14)
10
85
3
0
1
4
0
0
12
18
72
0
617
87
909
504
ALP
CA
CLP
EWCP
Export Express
GO Loans
Inter Trde
Other 7(a)
Patriot Express
PLP
RLA
SBAExpress
SLA
Grand Total

5. SBA Fees in FY2014
thru 9/30/14
 All SBA 7(a) Loans of $150,000 or less have:
 NO Guaranty fee
 NO on-going servicing fee for the lender
 Loans above $350,000:
 on-going servicing reduced to @.52basis points
 As of 1/1/2014 ALL SBA Express loans to VETERANS
(Patriot Express expired on Dec 31st, 2013)
 No guaranty fee up to $350,000

6. It Made a Difference!
Regionally………….
 FY `13 – 73% of loans were <= $150,000
 FY `14 (thru 1/31) – 81% of loans are <= $150,000
FY `13
Through 1/31
FY `14
Through 1/31
MA 73% 86%
NH 74% 81%
VT 72% 74%
ME 73% 77%
RI 65% 79%
CT 56% 67%

7. www.sba.gov/ma

8. FY 14 YTD: (10/1/13 - 2/21/14)
7(a) "Estimated " Borrower Fee Relief for loan sizes
less than = to $150K
FEE RELIEF:
$6.3M – US
$315K - MA

9. What is a SBA Loan?
It’s a Guaranty Loan
Lender disburses their dollars
Lender Services
Lender Liquidates
SBA’s guaranty offsets lender’s risk

10. “On SBA-guaranteed loans, the cash flow of
the Small Business Applicant is the primary source
of repayment, not the liquidation of collateral.
Thus, if the lender’s financial analysis
demonstrates that the Small Business Applicant
lacks reasonable assurance of repayment in a
timely manner from the cash flow of the business,
the loan request must be declined, regardless of
the collateral available.”
PREMISE OF SBA LENDING

11. Standard 7(a)Loan Processing Centers:
Located in Citrus Heights, California and Hazard, Kentucky:
Processes Standard 7(a), Small Lender Advantage and the Community Advantage loan
programs
Sacramento Loan Processing Center:
Processes 504 loan programs
Commercial Loan Service Center
Located in Little Rock, Arkansas:
Services SBA loans for the eastern half of the United States, and handles liquidation of 504
loans, processing of guaranty purchase requests and the liquidation of defaulted loans made
under the SBA Express programs.
Loan Guaranty Purchase Center
Located in Herndon, Virginia
Processes requests to honor loan guaranties on 7(a) loans.

12. VARIOUS DELIVERY METHODS
The Agency guarantees 7(a) Program Loans through various methods including:
1. Standard 7(a) Guaranty
a) Small Loans up to and including $350,000 ("Small Loan Advantage (SLA)")
b) Loans over $350,000 to $5,000,000
2. Certified Lenders Program (CLP)
a) Small Loans up to and including $350,000 ("SLA")
b) Loans over $350,000 to $5,000,000
3. Preferred Lenders Program (PLP)
a) Small Loans up to and including $350,000 ("SLA")
b) Loans over $350,000 to $5,000,000
4. SBA Express (delegated)
5. Export Express (delegated)
6. Community Advantage (Pilot Program)
a) Loans up to and including $250,000 (covered by a separate Community Advantage Participant Guide)

13. www.sba.gov/ma
Eligibility Requirements
 Be operated for profit
 U.S. citizens or owners with verified “green
card” status
 Not exceed SBA size standards
 Owners must be of “good character”
 Meet SBA’s “personal resource test”
 Owners must possess management ability and
have experience in field.
 Demonstrate repayment ability
 Not engaged in lending, real-estate
development, investments or speculation

14. Ineligible Businesses
Certain business types are ineligible for SBA
assistance.
 A non-profit business
 Primarily engaged in lending
 A passive business owned by developers or landlords that do not actively
use or occupy the assets acquired or improved with the loan proceeds that
is not an Eligible Passive Company discussed below (e.g. shopping
center)
 A life insurance company (life insurance agents, however, may be eligible)
 Located in a foreign country or owned by undocumented aliens
 Selling through a pyramid or multi-level sales distribution plan
 Deriving more than one-third of gross annual revenue from legal gambling
activities
 Engaged in any illegal activity
 Restrict patronage for reason other than capacity
 A government-owned entity (a small business owned or controlled by a
Native American tribe may be eligible if the business is a legal entity
separate from the tribe)

15. Ineligible Businesses
Certain business types are ineligible for SBA
assistance.
 Principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious
beliefs
 A consumer or marketing cooperative (producer cooperatives may be eligible)
 Earning more than 1/3 of its gross annual revenue from packaging SBA loans
 Business with an associate who is incarcerated, on probation, on parole, or has been
indicted for a felony or a crime of moral turpitude
 Business in which the Lender or any of its associates owns an equity interest
 Business which presents live performances of a prurient sexual nature or derives more than
5 percent of its gross revenue from the sale of products or services, or the presentation of
any depictions or displays of a prurient sexual nature
 Business that has defaulted, or has a principal who has defaulted, on a Federal loan or
Federally-assisted financing resulting in the Federal government sustaining a loss, (unless
waived by SBA for good cause)
 Primarily engaged in political or lobbying activities
 Speculative in nature (such as a shopping center developer, oil wildcatting, or primarily
engaged in R&D)

16. Eligible Use of Proceeds
SBA loans may be used to:
 Purchase machinery, equipment, fixtures, buildings
and land for business;
 Finance receivables and augment working capital;
 Refinance existing debt - including credit card debt (with compelling
reason);
 Finance seasonal lines of credit; and/or
 Expand, renovate facilities;
 Construct commercial buildings.
 Change of ownership/purchase of a business
 Most legitimate business purposes

17. Debt Refinancing Criteria
A lender may refinance an existing non-SBA
guaranteed loan or borrower debt from
another lender if: The existing loan no longer
meets the needs of the applicant
(for example if the current loan is a term loan
and a revolver is needed)
 Requires “substantial benefit” to applicant
 Looks to 10% improvement in monthly payments (P &
I)
 SBA requires copies of all notes that will be
refinanced
 Demand, interest only, balloon notes will automatically
meet substantial benefit test

18. Debt Refinancing Criteria
Home Equity Line of Credit (HELOC) or Credit Card Debt
that was used for business purposes.
The borrower must certify that the amount being refinanced
was used exclusively for business purposes and provide
appropriate documentation, such as a copy of the note
and/or current loan statement, to demonstrate that the debt
was, in fact, used for business purposes.
For example, a sole proprietor may demonstrate that the
debt was used for business purposes by providing a copy
of the note and documentation that shows the debt is
reflected on the business balance sheet and/or the interest
deduction is reported on the Schedule “C” not the Schedule
“A” of the proprietor’s tax return. If the interest deduction
reported on the Schedule C includes multiple debts, then
the applicant must provide a copy of the appropriate IRS
Form 1098 related to the debt being refinanced

19. Refinance
 Refinancing Same Institution Debt
 Late is defined as any payment made 29 days beyond the due date or
maturity
 Transcript for past 36 months or life of loan (whichever is less) must be
included showing due dates & when payments were received as part of the
credit analysis
 Refinancing an SBA Guaranteed Loan
 Evidence must be retained in the file showing the existing lender was unwilling
to approve an increase in the loan amount or a second loan and/or the lender
is unwilling or unable to modify the current payment schedule
 The Borrower or the new lender may obtain this documentation
 Refinancing an existing 504 using 7a
 A 7a loan can be used to refinance an existing 504 as long as it meets refi
requirements PLUS either:
 Both the 3rd Party & 504 loan are being refinanced OR
 The 3rd Party loan has been paid in full & the 504 needs to be refinanced as
part of a larger transaction to facilitate an expansion or renovation to the
project property
 504 pre-payment penalties CANNOT be waived

20. Ineligible Use of Proceeds
 To repay delinquent IRS withholding taxes, sales taxes or similar funds
held in trust.
 To provide or refinance funds used for payments, distributions, or loans to
Associates of the Applicant, except payment of ordinary compensation for
services rendered at a fair and reasonable rate.
 Relocation of the business out of a community if there will be a net
reduction of one-third of its jobs or a substantial increase in unemployment
in any area of the country unless the relocation is for key economic
reasons crucial to the applicant and the benefits to the applicant and the
receiving community outweigh the negative impact on the community from
which the applicant is moving.
 Community improvements, such as curbs and sidewalks, in excess of 5
percent of construction proceeds of this loan.

21. Real Estate Acquisition
 If loan proceeds are to be used to purchase or
construct real estate, we look for “owner
occupancy”
 Eligible small business must occupy 51% + of an
existing facility or
 60% of a newly constructed facility on day one,
with expansion to 80% in 10 years

22. Lenders should be guided by the Eligibility
Questionnaire which is part of the loan
application
In doubt?
If you are comfortable, but not 100% sure…
 Print the page from the SOP that lead you to your
decision and include it in the file.
 Ask 7aQuestions@SBA.gov. Include their answer in the
file.
 Call us, we will research the SOP and reiterate its
contents – not make a determination.
 Use conventional 7(a).
Determination of Eligibility

23. 2008
Credit Elsewhere
Acceptable factors that demonstrate an identifiable weakness in the credit or exceed policy
limits of the lender include, among others:
a) The business needs a longer maturity than the lender’s policy permits (for example, the
business needs a loan that is not on a demand basis);
b) The requested loan exceeds either the lender’s legal lending limit or policy limit regarding
the amount that it can lend to one customer;
c) The lender’s liquidity depends upon selling the guaranteed portion of the loan on the
secondary market;
d) The collateral does not meet the lender’s policy requirements;
e) The lender’s policy normally does not allow loans to new businesses or businesses in the
applicant’s industry; and/or
f) Any other factors relating to the credit that, in the lender’s opinion, cannot be overcome
except for the guaranty. These other factors must be specifically documented in the loan file.
The lender must certify that credit is not otherwise available by
signing the Lender Official block on the appropriate application
form.

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

25.  Based on intended use of proceeds
 Inventory or Working Capital – 10 Years
 Equipment
 10 years
 Up to 25 years with documentation to support useful life
 Real Estate – 25 years + construction period
 Mixed Purpose
 Blended based on use of proceeds or
 Maximum for the largest asset class
Maximum Maturities

26. 7a Interest Rates
Loan Amount Maturity Maximum Rate
Loans $25,000 or less (Maturity less than 7 yrs.) Base Rate + 4.25%
Loans $25,000 or less (Maturity over 7 yrs.) Base Rate + 4.75%
Loans $25,001 to $50,000 (Maturity less than 7 yrs.) Base Rate + 3.25%
Loans $25,001 to $50,000 (Maturity over 7 yrs.) Base Rate+ 3.75%
Loans over $50,001 (Maturity less than 7 yrs.) Base Rate + 2.25%
Loans over $50,001 (Maturity over 7 yrs.) Base Rate + 2.75%

27. Express Rates
Loans $50,000 or less Prime + 6.5%
Loans $50,001 or more Prime + 4.5%
The rate used is the one in effect on the date SBA
receives the complete application.
For current rates, please visit
www.colsonservices.com/main/news.shtml
Current rates are also located on the For Lenders main
page.

28. SBA Size Standard
• Manufacturing from 500 to 1,500 employees
• Wholesaling 100 employees
• Services from $4.5 million to $32.5 million in average
annual receipts
• Retailing from $6.5 million to $26.5 million
• General construction from $6.5 million to $32 million
The 2010 Jobs Bill expands the number of businesses eligible
for SBA loans by increasing the alternate size standard to those
small businesses with less than $15 million in net worth and $5
million in average net income
www.sba.gov/size

29. Concerns and entities are affiliates of each other when one controls or has the power to
control the other, or a third party or parties controls or has the power to control both. It
does not matter whether control is exercised, so long as the power to control exists.
SBA considers factors such as ownership, management, previous relationships with or
ties to another concern, and contractual relationships, in determining whether affiliation
exists.
Control may be affirmative or negative. Negative control includes, but is not limited to,
instances where a minority shareholder has the ability, under the concern's charter, by-
laws, or shareholder's agreement, to prevent a quorum or otherwise block action by the
board of directors or shareholders.
Affiliation may be found where an individual, concern, or entity exercises control
indirectly through a third party.
In determining whether affiliation exists, SBA will consider the totality of the
circumstances, and may find affiliation even though no single factor is sufficient to
constitute affiliation.
~ page 92
www.ecfr.gov
13.121.103
AFFILIATES

30. 4506-T
SBA’s Tax Verification process is to determine if:
The Small Business Applicant filed business tax returns; and
The Small Business Applicant’s financial statements provided as part of the application
agree with the business tax returns submitted to the IRS.
Please note: for loans up to $350,000. verification must be done prior to loan
submission
For a sole proprietorship, the lender must verify the Schedule C.
For a change of ownership, the lender must verify the seller’s business tax returns or a
sole proprietor’s Schedule C. Where there is an acquisition of a division or a segment of
an existing business, other forms of verification may be used in lieu of the 4506-T (e.g.
Sales tax payment records).
If the business has been operating for less than 3 years, lender must obtain the
information for all years in operation.

31. Personal Financial Statement
 Can use SBA 413 or lender
form
 Must be less than 90 days old
 Must be submitted for all
officers, directors, principals and
20% owners, spouses and
children's assets.

32. Liquid Resource Test
 Total Financing Package (TFP) –
includes SBA loan(s), equity
injection, and any other financing
 Applies to each 20% owner
(including spouse and
dependent children)

33. WHEN TFP IS:
<$250,000 – 2 x TFP or $100,000 whichever
is the greater
>$250,001 < $500,000 – 1 ½ x TFP or
$500,000 whichever is the greater
>$500,000 – 1 x TFP or $750,000 whichever
is the greater
Once the exemption is determined, it is
subtracted from the liquid assets. If the
result is positive, that amount must be
injected into the project.

34. Liquid Assets Include:
• Cash or Cash equivalents including: savings
accounts, CDs, stocks, bonds or similar assets
• Cash surrender value of life insurance
DOES NOT INCLUDE: Retirement accounts or
closely held non-marketable stocks or equity in real
estate

35. Good News!
Regulations Effective April 21, 2014:
• Personal Resource Test eliminated
(for both 504 and 7(a))

36. What Hasn’t Changed as of 1/1/14?
 Loan guaranty amounts remain the same
 Traditional 7a loans of $150,00 or less = 85%; greater than $150,000 =
75%
 SBA Express loans 50%
 Export Express loans of $350,000 or less = 90%; greater than $350,000
= 75%
 Credit decisions are based upon the Borrower’s
ability to repay – SBA is a cash flow lender
 Most eligibility rules stayed the same
 Size standards haven’t changed (but don’t
forget about affiliates)
 Most things…

37. What Has Changed?
 All non-Express 7a loans of $350,000 or less will be
processed “SLA like”
 Tax Transcript Requirement
 DUNS Number - Recommended
 Simplified Forms
 Simplified Life Insurance Rules
 Clarification provided for
- Debt Service Coverage
Ratio Requirements
- Credit Memo
Requirements
- Collateral
- Debt Refinance
- Timing of 1502 Reporting
- Prior Loss to the
Government

38. What has changed?
Continued
 IRS Tax Transcripts must be reviewed PRIOR to
submission to Citrus Heights on all non-delegated
lenders
 prior to disbursement on delegated loans
 All 7a loans will use Forms 1919 & 1920
 No more Form 4 or Form 4-I
• Lenders may use their own Note & Guaranty
 Must be legally enforceable & assignable, have stated maturity & not
be payable on demand
 Must include “SBA Language” re: interpretation & enforceability
 If selling on the Secondary Market using Forms 147 & 148 is
recommended
 912 Only required when an issue is revealed on Form
1919
 1502 Reporting to Colson begins as soon as a loan

39. If the lender uses its own note form, the lender must ensure
that the note is legally enforceable and assignable, has a
stated maturity and is not payable on demand. In addition,
if the lender uses its own note form, the note must include
the following language: “When SBA is the holder, this Note
will be interpreted and enforced under federal law, including
SBA regulations. Lender or SBA may use state or local
procedures for filing papers, recording documents, giving
notice, foreclosing liens, and other purposes. By using such
procedures, SBA does not waive any federal immunity from
state or local control, penalty, tax, or liability. As to this
Note, Borrower may not claim or assert against SBA any
local or state law to deny any obligation, defeat any claim
of SBA, or preempt federal law.”

40. If the lender uses its own guaranty form, the guaranty must include
the following language: “When SBA is the holder, the Note and this
Guarantee will be interpreted and enforced under federal law,
including SBA regulations. Lender or SBA may use state or local
procedures for filing papers, recording documents, giving notice,
foreclosing liens, and other purposes. By using such procedures,
SBA does not waive any federal immunity from state or local control,
penalty, tax, or liability. As to this Guarantee, Guarantor may not claim
or assert any local or state law against SBA to deny any obligation,
defeat any claims of SBA, or preempt federal law.”

41. Other SOP Changes
effective January 1, 2014
 SBA 7a loan can be used to refinance an existing 504
- Prepayment penalty & debt refi rules still apply
• Financials are current if within 180 days (PFS 90
days)
- must be dated & signed
• All 7a requests submitted via ETRAN or
electronically:
- Supporting documentation can be submitted using ETRAN
Document upload or Send this File (remember to include the APP
number if sending via Send this File)
- Email is NOT secure & has size limitations, so STRONGLY
discouraged for supporting documentation submission and not
acceptable for application submission
- Loans must be submitted via e-tran

42. Loan submissions:
 Standard 7(a), CLP, and CAPLines (non-delegated) applications
must be sent via E-Tran, or to the 7(a) Loan Guaranty Processing
Center (“LGPC”) electronically.
1. Email: 7aloanprogram@sba.gov
- attachments less than 9 megabytes in size.
2. Website:
- http://www.sba.gov/aboutsba/sbaprograms/elending/lgpc/index.html
- click on “Submit 7(a) Document Here” or “sendthisfile.com”

43. SBA One
There will now be Minimum Credit Underwriting Standards
Separated Between:
 Those Used on any Request for Guaranty Processed
through Standard, CLP, or PLP Procedures and for
$350,000 or less.
 Those Used on any Request for Guaranty Processed
through Standard, CLP, or PLP Procedures for more than
$350,000
 Express Loans – no changes made to program

44. SLA Moniker
 Where the initials “SLA” are used in this SOP, it refers
to any loan up to and including $350,000 where the
Request for Guaranty is Processed through
Standard, CLP, or PLP Procedures
 The former SLA Underwriting Standards are the
Standards for Loans of $350,000 or Less

45. 7(a) loans up to $350K
All Small 7(a), also known as SLA loan applications
will be credit scored by SBA prior to loan approval (or
issuance of a loan number if processed by a PLP
lender).
The credit score is calculated based on a combination
of consumer credit bureau data, business bureau data,
borrower financials, and application data. (not be
confused with the Small Business Predictive Score
(SBPS) used in lender portal.
The minimum credit score is based on the lower end of
the risk profile of the current SBA portfolio and may be
adjusted up or down from time to time. The minimum
score will be posted on SBA website. The current
minimum SLA credit score is 140

46. 37%
29%
26%
22%
17%
12%
7%
5% 3% 2% 2% 1% 1% 1% 0%
Purchase Rates
by SBPS Score Band
 FICO/D&B’s LiquidCredit scores use
commercial and consumer data to predict
purchase risk.
 FICO/D&B developed the suite using loan,
lease, and card data from lenders
nationwide.
 Small business credit scores are
compensatory.
 Criteria do not have hard-cutoffs, and scores do not
always use all criteria or data sources.
Credit Scores Will Predict Risk More Accurately
and Simply Than Complex Underwriting
Source: SBA Loan/Lender Monitoring System.
Below 140: 21% Above 140: 3.7%
Small Business Credit Scores
Accurately Predict Purchase
This Score Suite is an Industry-
Standard Decisioning Tool
Large National Banks Smaller Regional Banks
KeyBank AgriLand Farm Credit Services (TX)
Huntington National Bank Five Star (NY)
PNC Glenview State (IL)
RBC Rockland Trust (MA)
USBank Associated Bank (WI)
Zions Bank First Volunteer (KY/TN)
HSBC Bank of Idaho
Sovereign Bank Union Bank of California
 Banks across the country use the suite for
evaluating borrower risk.
 Under the new Small Loan Advantage, SBA
will only approve loans scored above 140.
Sample Users of Small Business Credit Scores
Source: Dun & Bradstreet, Fair Isaac Corp.

47. SBSS scores use commercial and consumer data to
predict purchase risk
Example Disqualified Profile
SBSS Score 119
589
10
120
Utilization: >75%. Delinquencies: 6.
Example Qualified Profile
SBSS Score 178
782
0
120
Utilization: 0. Delinquencies: 0.
FICO score
# of inquiries
Average months in file
Etc.: Credit utilization
55%
Less than 2 years
2
Poor paydex. 1 line; avg. 60 days
delinquent.
100%
More than 2 years
0
Good paydex. 4 lines; 0 past terms.
% sat. trade lines
Time as current owner
Total # suits
Etc.: Paydex, trade lines
Less than $75k
Less than 2 years
Less than $100k
Sales: <$500k. Employees: 0. Mining
industry.
More than $75k
More than 2 years
More than $100k
Sales: >$500k. Employees: >2.
DDA total balance
Time as current owner
Principals’ combined net worth
Etc.: Sales, employees, industry
Low
55%
Low
High
100%
High
Cash-to-assets ratio
Current ratio
EBIT-to-interest ratio
Credit
bureau
Business
bureau
Application
Financial
s
Source: Dun & Bradstreet, Fair Isaac Corp.

48. Before obtaining an SBSS score you must input information about the
small business borrower and small business principals into E-tran
Business Data
Required
 Business legal name
 Business address
 Business phone
 Tax ID (EIN)
 DUNS number
(suggested)
Principal Data Required
 First name
 Last name
 SSN
 Address
 Required for each
principal owner with 20%
or more equity share of
the applicant small
businessOnce all required information is entered into E-Tran, the ‘Check Credit
Score’ icon will appear
Note: An SBSS score can be generated by entering the above information into E-tran (as described in the
successive slides) however the loan cannot be submitted for an SBA loan number until the application is
complete

49. For Loans of $350,000 or Less
The lender’s credit memo must include:
With the exception of loans under $50,000, the
small business applicants global cash flow
coverage is equal to or exceeds 1:1 on either a
historical or projected cash flow basis. – does not
have to occur year 1
Document in the loan file the definition or formula
used to calculate the global cash flow
Credit Memo

50. For Loans of $350,000 or Less
The lender’s credit memo must include:
Lenders must verify and reconcile the applicant’s
financial data against income tax data prior to
submitting a request for guaranty for a loan of
$350,000 or less using Standard, CLP, or PLP
processing.
Prior to submission for all non delegated loans
Prior to disbursement for delegated loans
Credit Memo
Continued

51. For Loans of $350,000 or Less
The lender’s credit memo must include:
Lender must determine if the equity and the pro-forma
debt-to-worth are acceptable based on its policies
and procedures for its similarly-sized, non-SBA
guaranteed commercial loans.
If the lender requires an equity injection as part of its
policies it must do so for SBA loans.
Credit Memo
Continued

52. Loans Over $350,000
For all Requests for 7(a) Guarantee of loans
greater than $350,000 processed through
Standard, CLP, or PLP procedures,
Lender’s analysis must demonstrate the Small
Business Applicant’s ability to repay the loan
from the cash flow of the business.
The Analysis should conclude that repayment
ability of the proposed SBA loan and all other
debt reasonably exists from the operating cash
flow of the business defined as earnings before
interest, taxes, depreciation and amortization
(EBITDA);
Lender’s Analysis

53. For Loans Over $350,000
 Operating Cash Flow (OCF) is defined
as Earnings Before Interest, Taxes,
Depreciation and Amortization
(EBITDA)
Calculating Repayment

54. For Loans Over $350,000
In order to determine EBITDA, the Lender must
make appropriate adjustments - Additions &
Subtractions to cash flow such as:
 Unfunded capital expenditures;
 Non-recurring income;
 Expenses and distributions;
 Distributions for S-Corp taxes;
 Rent payments;
 Owner’s Draw; and/or
 Assessment of impact on cash flow to/from any affiliate
business
Determining EBITDA

55. For Loans Over $350,000
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.
Debt Service Coverage

56. Credit Memo
For Loans Over $350,000
The Lender’s Credit Memo Must Include:
• Analysis of historical cash flow that demonstrates total debt
service coverage including the SBA loan and other balance
sheet debt; or
• Analysis of projected cash flows, (start-ups and expansions)
that demonstrates total debt service coverage including the
SBA loan and other balance sheet debt, with detailed
assumptions in support of projections.
• Spread of pro-forma Business Balance Sheet (current
business balance sheet + changes in assets and liabilities as
a result of the loan, other debt, any required equity injection
and use of proceeds)

57. For Loans Over $350,000
The Lender’s Credit Memo Must Include:
Ratio calculations (based on the pro-forma Balance Sheet
and historical and projected Income Statements) as
described in the SOP.
 Ratio calculations (based on the pro-forma Balance Sheet and
historical and projected Income Statements) for the following
financial ratio benchmarks:
 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
Ratio Calculations

58. Equity Requirement for
loans in excess of $350,000
Amount of Equity
 Adequate equity is important to ensure the long
term survival of a business. The lender must
determine if the equity and the pro forma debt-to-
worth are acceptable based on the factors related
to that type of business, experience of the
management and the level of competition in the
market area. The lender must include in its credit
analysis a detailed discussion of the required equity
and its adequacy.

59. Cash that is not borrowed
Cash is borrowed if;
Applicant can demonstrate repayment of this personal
loan from sources other than the cash flow of the
business, the cash injection may be considered equity.
 Salary of business owner does not qualify
 Any loan made to an individual for the purpose of providing an
equity injection into the business must be disclosed.
– Lender’s credit analysis must address the impact on the personal
and business balance sheets and sources of repayment for such
side loans.
 If the SBA participating lender is providing the personal loan, the
lender must submit the application for guaranty through
standard 7(a) processing.
~ page 187
SOURCE OF EQUITY

60. Equity Injection
Lenders must verify the injection prior to disbursing loan
proceeds and must maintain evidence of such verification in their
loan files. Verifying a cash injection requires the following
documentation:
A copy of a check or wire transfer along with evidence that the
check or wire was processed showing the funds were moved
into the borrower’s account or escrow;
A copy of the statements of account for the account from which
the funds are being withdrawn for each of the two most recent
months prior to disbursement showing that the funds were
available; and
A subsequent statement of the borrower’s account showing that
the funds were deposited or a copy of an escrow settlement
statement showing the use of the cash.
A promissory note, “gift letter” or financial statement is not
sufficient evidence of cash injection without corroborating
evidence consistent with paragraph above.

61. Specific requirements for debt service
coverage and EBITDA calculations have
been added
Operating Cash Flow defined as: earnings
before interest, taxes, depreciation and
amortization (EBITDA)
Minimum debt service coverage must be 1.15
to 1 or greater
SUMMARY
Loans Over $350,000

62. 7a Underwriting& Credit Analysis
Loans of $350,000 or Less
 Submit via ETRAN
 Loan will be prescreened in ETRAN
 If SCORE is not acceptable app Express or Loan Processing Center
approval may be used
 Credit Memo includes:
 Cash flow analysis reflecting ability to repay with a DSCR of 1:1 or better
 History of the business, length of time in business & discussion of
management
 Loans of $50,000 or greater must show repayment ability based upon Global
Cash flow (GCF DSCR of 1:1 or better)
 Analysis of business strength, deposits, credit history, etc.
– Owner/Guarantor including PFS consistent w/non-SBA loans
– Equity & pro-forma debt to worth must be acceptable based on lender’s policy
for non-SBA loans
– Equity injection required consistent with lender’s non-SBA loans
– Must collect and analyze business tax returns (verify with IRS prior to
submission)

63. 7a Underwriting
& Credit Analysis
Loans of more than $350,000
 Submit via ETRAN
 Loans will not be prescreened in ETRAN
 Credit Memo includes:
 Cash flow analysis reflecting ability to repay with a DSCR of 1.15:1 or better
 Repayment analysis based upon historical cash flow or projections if business is new or
expanding
 History & nature of the business; length of time in business, management depth &
industry experience
 Assessment of repayment ability based upon EBITDA (Operating Cash Flow) divided by
debt service (12 months P & I payments including new loan
 Adjustments to EBITDA should be made when necessary (unfunded cap. Expenditures;
non-recurring income; expenses & distributions; S-Corp taxes; rent; owner’s draw; impact
of affiliates, etc.)
 If using projections analysis of assumptions including reason for reduced expenses &
revenue growth
 Pro-forma balance sheet, ratio calculations (current ratio, debt/net worth, DSC, & any
others considered relevant)
 Working capital analysis to support projected sales grown in next 12 months
 Collateral adequacy assessment
 Explanation and justification for debt refinancing

64. Collateral
 Collateral is NOT required for loans of $25,000 or less
 Collateral is required on loans of more than $25,000 up to
$350,000 with the lender following their own collateral policies &
procedures for non-SBA guaranteed loans BUT at a minimum
the lender must obtain a lien on the applicant’s fixed assets to
secure the loan
 Trading Assets MAY be skipped with the lender going directly to
personal real estate if trading assets are needed as collateral on
a LOC
 For loans in excess of $350,000 the loan must be collateralized
to the maximum extent possible UP TO THE LOAN AMOUNT
 An SBA Guaranty CANNOT be used as a substitute for available
collateral
 Express collateral has not changed. Banks must follow same
policies as non SBA portfolio.

65. When is a loan considered
“Fully Secured”?
 Liquidation value of the collateral taken is equal to the loan amount
 Adjusted Net Book Value = The Asset’s original price minus depreciation
& amortization
 Senior Lien Amounts must be subtracted from the value calculating to
determine if Fully Secured
 Lender must take the following until the “fully secured” mark is hit:
 All assets acquired with proceeds
 Any other fixed business assets
 Business trading assets
 Personal residential & investment property
 New Equipment – 75% of net book value or 80% of orderly liquidation
appraised value
 Used Equipment – 50% of net book value or 80% of orderly liquidation
appraised value
 Commercial Real Estate – 85% of appraised value
 Residential & Investment Real Estate – Lender’s normal valuation for
non-SBA guaranteed loan
 Trading Assets – 10% of current book value & only must be taken if
lender does on similarly sized non-SBA guaranteed loans

66. Franchises &
Size Determination
 The term “franchise agreements” refers to all
franchise, license, dealer, jobber or similar
agreements
 The two parties involved in any of those agreements
are referred to as “franchisor” & “franchisee”
 The agreement cannot exert undo control over the
franchisee or an affiliation exists
 Franchise Agreement Review & Determination
 Loans processed through Citrus Heights except CLP – SBA Review
 PLP, SBA Express, other delegated processing methods – Lender
Review or they can be submitted to
DelegatedFranchiseReviews@sba.gov
 Check www.franchiseregistry.com to see if the franchise agreement
has been approved previously by the SBA Franchise Committee for
size/affiliation & control issues
 If not on the Franchise Registry check the SBA Franchise Findings
List available at www.sba.gov/content/franchise-findings

67. Check For Prior Loss
or Debarment
 Delegated lenders are responsible for accessing the
records in E-Tran to determine if any of the individuals or
businesses experienced a Prior Loss.
 Lenders must check CAIVRS for borrowers
 Individuals and entities suspended, debarred, revoked, or
otherwise excluded under the SBA or Government-wide
debarment regulations are not permitted to conduct business
with SBA, including participating in an SBA-guaranteed loan.
 Lenders must check SAM for employees/agents

68. CAIVRS is used to determine if a loan applicant has a
Federal debt that is currently in default or foreclosure or
has had a claim paid by the reporting agency within the
last 3 years.
Unless, you are sending the loan package to SLP for a
decision, you must pull a report and maintain in your file.
If you are not set up for CAIVRS, please contact me as
soon as possible for instructions on how to get access.
CAIVRS

69. Enter your User ID and Password
into the “pop up box.”
CAIVRS Prescreening is where you
enter the tax id numbers for the small
businesses (EIN) and the
owners/guarantors (SSN).
Limit of 5 per inquiry screen.
Enter your Lender EIN number (tax
id). (Do not enter any dashes or
spaces in the EIN number.)
For SBA loans, your lender ID is your
company's tax ID (EIN), followed with a
capital "T". Enter your company's nine
digit Tax ID in the lender ID box, DO
NOT USE ANY DASHES, followed
immediately with a capital "T"
(*********T).
For the Agency, select Small
Business Administration.
Press send.
What To Enter To Receive A Report

70. What Do I Do With The CAIVRS
Report
If the report results show no delinquent federal debt:
Print a copy and include it in your loan file.
If the report results do show a delinquent federal debt:
Print a copy for your loan file.
Call the phone number shown on the report.
Supply the information to the applicant.
Have the applicant get the debt resolved.
Have the applicant bring you verification, from the agency in question, that
the debt has been satisfied.
Keep the verification documents in your loan file.

71. Other Items of Note…
 A “qualified source” is an individual who regularly receives
compensation for business valuations and is accredited by one
of the following recognized organizations:
 1. Accredited Senior Appraiser (ASA) accredited through the
American Society of Appraisers;
 2. Certified Business Appraiser (CBA) accredited through the Institute
of Business Appraisers;
 3. Accredited in Business Valuation (ABV) accredited through the
American Institute of Certified Public Accountants;
 4. Certified Valuation Analyst (CVA) accredited through the National
Association of Certified Valuation Analysts; and
 5. Accredited Valuation Analyst (AVA) accredited through the National
Association of Certified Valuation Analysts.
 Refinance of change of ownership debt no longer requires a
valuation

72. Benefits to Express
 Follows lenders’ own underwriting polices
 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.
 Uses lenders own collateral policy for loans above
$25,000
 Do not have to take personal residence

73. Express Activity (3/21/14)
Nationally: 51% of all loans approved
MA: 76% of all loans approved

74. Express Credit
SBA has authorized SBA Express, Export Express
and SBA Veterans Advantage to make the credit
decision without prior SBA review. The credit
analysis must demonstrate that there is a
reasonable assurance of repayment. The lender is
required to use appropriate, prudent and generally
accepted industry credit analysis processes and
procedures (which may include credit scoring), and
these procedures must generally be consistent with
those used for its similarly sized non-SBA
guaranteed commercial loans. Lenders that do not
use credit scoring for their similarly sized non-SBA
guaranteed commercial loans may not use credit
scoring for SBA Express or Export Express.

75. Veterans Advantage
SBA developed the SBA Veterans Initiative to support
the entrepreneur segment of the Nation’s military
community (including spouses). This initiative uses
streamlined documentation and processing features as
SBA Express.
Must be processed thru ETRAN
Maximum Loan amount - $350,000
Guaranty 50%
Currently loan fees are waived for veterans up to
$350K

76. Veterans Advantage
Eligibility for Veterans Advantage is limited to businesses that meet SBA’s standard
eligibility requirements discussed above and that are 51% or more owned and
controlled by an individual or individuals in one or more of the following groups:
 Veterans
 Service Disabled Veterans
 Soon to be discharged active-duty service members eligible for the
military’s Transition Assistance Program
 Active Reservist and National Guard Members
 Current spouses of any of the above
 The widowed spouse of a service member or veteran who died during
service or of a service-connected disability

77. Veterans Advantage
Lenders must document in their loan file a borrower’s eligibility for Veterans
Advantage using the following DOD/DVA documentation, including the 51%
ownership by the above, and must present copies of that documentation with
any request to SBA to purchase:
a) Veteran: Copy of Form DD 214, which is provided for other than dishonorably discharged veterans.
b) Service-Disabled Veteran: Copy of Form DD 214 or documentation from the DVA that the veteran
has been determined as having a service-connected disability.
c) Service Member: DOD photo card (Geneva Convention Identification Card) and Form DD 2648
(active duty service member) or Form 2648-1 (reserve component member).
d) Transitioning Active Duty Military Member: DD Form 2, "U.S. Armed Forces Identification Card
(Active)," or DD Form 2, "Armed Forces of the United States Geneva Conventions Identification Card
(Active)" and, DD Form 2648 (Active Duty Military member) or DD Form 2648-1 (Reserve Component
member ).
e) Reservists and National Guard: DD Form 2, Armed Forces of the United States Identification Card
(Reserve).
f) Current Spouse of Veteran: The veteran’s Form DD 214 and evidence of status as a current spouse.
g) Current Spouse of Transitioning Active Duty Military Member or Current Reservist/National Guard
Member: DD Form 1173, Department of Defense Guard Reserve Family Member Identification Card
and evidence of status as the current spouse.
h) Widow of Active Duty Service Member who died in service or Widowed Spouse of Veteran who died
of a service connected disability: Documentation from DOD or from DVA clearly showing this to be the
case.

78. Export Express
The Export Express Program is designed to help SBA
meet the export financing needs of small businesses
too small to be effectively met by existing SBA export
loan guaranty programs. It is generally subject to the
same loan processing, making, closing, servicing, and
liquidation requirements as well as the same maturity
terms, interest rates, and applicable fees as the SBA
Express Loan Program.
Increased Maximum Loan amount - $500,000
Increased Guarantee – 90% for loans of
$350,000 or less - 75% for loans over $350,000 up
to $500,000.

79. Export Express
 Additional Eligibility Requirements for Export Express
 a) Must have been in operation, although not necessarily in exporting, for at least 12
full months. However, applicants that have been in operation for less than 12 months
are eligible if both of the following conditions are met:
 (1) The applicant’s key personnel have clearly demonstrated export expertise and substantial
previous successful business experience, and
 (2) The lender processes the Export Express loan using conventional commercial loan
underwriting procedures and does not rely solely on credit scoring or credit matrices to
approve the loan. Evidence of compliance with both of these requirements must be retained
by the lender in its file.
 b) Small Business Applicants with operations, facilities or offices overseas, other
than those strictly associated with the marketing and/or distribution of
products/services exported from the U.S., are not eligible for Export Express,
although they may be eligible for other SBA 7(a) financial assistance.
 c) Lender must maintain in its loan file information provided by the borrower as it
pertains to the use of proceeds for export development activities and its
projected impact on the borrower’s export sales along with an estimate of the
borrower’s export sales for the 12 month period following the date of the loan
application.

80. Form 912
If your borrower has answered “yes” to any of the following questions:
Are you presently under indictment, on parole or probation?
(IF YES, APPLICANT IS NOT ELIGIBLE FOR AN SBA LOAN)
or
Have you been arrested in the past 6 months for a any criminal offense or
Have you ever been convicted, plead guilty, plead nolo contendere, placed
on pretrial diversion, or placed on any form of probation, including probation
before judgment other than a minor vehicle violation?
If so
You will need to complete the 912 FORM

81. Form 912
If there is a “yes” response, the lender must take the following actions:
The lender must obtain a complete understanding of the reason(s) for the “yes” response and when
necessary for clarification, the lender must obtain additional written explanation from the Subject
Individual to include the following:
 (a) Date of the offense(s) including month, day and year. If the actual day is not known, include the
month and year.
 (b) City and state or the county and state where the offense(s) occurred.
 (c) The specific charge(s) [DUI, assault, forgery, robbery etc.] AND the level of the charge; (either a
misdemeanor or felony).
 (d) Disposition of the charge(s). This may include but is not limited to the following:
 (i) Any fines imposed;
 (ii) Any class or workshop to be attended;
 (iii) Any jail time served;
 (iv) If applicable, the terms of probation (including evidence and dates of successful conclusion of
the probation); or
 (v) Any other court conditions (such as registration as a sex offender).
 (e) Assuming the court’s conditions have been met, the applicant should state that all conditions of
the court have been satisfied in his explanation and provide court documents evidencing that these
conditions were met.
 (f) The borrower’s dated signature on the explanation.

82. Form 912
If the affirmative activity is not the 3 minor offenses over 10
years or 1 single misdemeanor as indicated in previous
slide, the lender cannot clear the application for processing,
the Form 912 and any supporting documentation must be
sent to the MA District Office, which will forward it to the
OIG/OSO for processing.
Currently, SBA conducts two types of background checks:
(1) a Name Check, which requires a search of available
records based on a person’s name and social security
number (SSN); and (2) a Fingerprint Check, which
searches available records based on the person’s name
and SSN plus a complete and legibly written FD-258
Fingerprint Card.
These background checks can take from 6-8 weeks.

83. Aliens Form G-845
Aliens must provide their alien registration number on SBA Form 1919.
Lenders must obtain a copy of the individual’s USCIS documentation .
All lenders must register designated personnel with the SLPC at
Sacramento504Register@sba.gov. Please send name of lender, lending
institution, bank’s address and phone number to
Sacramento504register@sba.gov
The SLPC will respond to such requests by providing instructions on how to
complete registration and to use the electronic verification process.
As required by USCIS, SBA will release information about the status of an
alien to lenders or other non-governmental entities ONLY when a signed and
dated authorization from the alien is attached to and submitted with the 845 on
that alien providing name, address and date of birth.

84. What documents do you need to send
in?
FOR $350K and Under –Small SBALOANS
912 (criminal activity, if applicable)
845 Alien (green card, if applicable)
Form 4506-T is to be faxed in to IRS, response and original form to be
retained in file.
Please submit information in ETRAN, upload completed
forms using “Documents Upload” feature the 1919, 1920
forms, credit memo, and all other related information,
hit submit button.

85. What documents do you need to send in?
FOR $350K and Over LOANS
As of 3/1/14 lenders are required to submit
applications to the LGPC using the 10-Tab format
for all loan guaranty requests

87. The 7(a) Authorization
 After SBA approves the loan guaranty, an Authorization
will be issued for the loan using the required language in
the National 7(a) Authorization Boilerplate.
 The Authorization is not a loan agreement. It is a contract
between the Lender and SBA, who each sign the
Authorization, indicating specific conditions which must
be met for SBA to provide a guaranty on a loan made by
the Lender to a Borrower.
 The requirements of the Authorization are directed to the
Lender not the Borrower, and the Borrower does not sign
the authorization.

88. When a loan is approved, a loan
authorization must be generated
 The Authorization spells out the terms of the loan, including
the amount, interest rate, any other terms and conditions
including collateral requirements, etc., and SBA’s guaranty.
 Authorizations do not need to be sent or faxed in
 Please retain in your file.

89. After the Loan is made
The lender must obtain all required collateral and
must meet all other required conditions before loan
disbursement, including obtaining valid and
enforceable security interests in any loan collateral.
These conditions include requirements identified in
the loan write-up, such as standby agreements,
appraisals, business licenses, and cash/equity
injections. In addition, for SLA loans over $250,000
that are collateralized by commercial real estate, the
lender must comply with the appraisal policy set forth
in Chapter 4.

90. Loan Modifications
Teri Hendrix 916.735.1961
7aloanmod@sba.gov
Include Business name, loan number, lender
phone/fax number
Within 10 days from approval
ALL MODIFICATIONS DONE IN CA
PRIOR TO FINAL DISBURSEMENT

91. After the Loan is made
Closing, Servicing and Liquidation
The SBA Express lender must close, service, and
liquidate its SBA Express loans using the same
reasonable and prudent practices and procedures that
the lender uses for its non-SBA guaranteed
commercial loans.

92. 1502 Reporting
 Mandatory on all 7a loans with an outstanding SBA
guaranty, regardless of payment activity.
 Promptly notify SBA of cancelled or withdrawn
loans.
 Reporting period includes the first calendar day
through the last calendar day of the prior month.
Colson Customer Service
www.colsonservices.com
Telephone: 1-877-245-6159
e-mail: info@colsonservices.com

94. Unilateral Servicing Authority
For all loan servicing actions not requiring
SBA’s prior written consent, lenders must
document the justifications for their
decisions and retain these and supporting
documents in their file for future SBA review
to determine if the actions taken by the
lender were prudent, commercially
reasonable and complied with all Loan
Program Requirements.

96. 7a Lender Matrix

99. • Cancel undisbursed loans.
• Terminate guaranty on disbursed loans.
• Decrease undisbursed loans.
• Change the use of proceeds, which does not involve
an increase to loan.
• Changes to maturity date or months on loans which
have not matured.
• Change loans from revolver to term or vice versa.
• Change legal/trade name or address.
• Change project from rural to urban or vice versa.
• Change principal(s) gender, race, veteran status,
citizenship.

100. Extension of Maturity Date
Subject to the general requirements in Paragraph A,
the maturity date of a Note may be extended for up
to 10 years beyond its original maturity date if:
a. The extension is requested before the SBA loan
guaranty expires, i.e., less than 180 calendar days
after the original maturity date and
b. The extension will aid in the orderly repayment of
the loan
See page 50 of SOP 5057
Maximum Maturities

101. Prior Consent
Should Include:
– Statement of the proposed action.
– What makes the request necessary/impact on the
SBC.
– Loan status.
– Financial statement analysis.
– Loan collateral analysis (“before” the modification
and “after” the modification).
– Lender must obtain the consent of all loan
obligors/guarantors.
Note: Typically, the lenders’ internal credit memorandum will suffice.
Send to: Lrsc.servicing@sba.gov

102. 102
SBA Working Capital and
Contract Caplines
Program Overview

103. CAPLines Program Structural Changes
 Reduce 5 subprograms to 4:
 Working Capital CAPLines (formerly Standard
Asset Based CAPLines and Eliminated Small Asset
Based CAPLines, maximum line amount $200,000.)
 Contract CAPLines
 Seasonal CAPLines
 Builder’s CAPLines
 Delegated processing for PLP Lenders
103

104. Key Features Working Capital
CAPLine
 Maximum line amount $5,000,000
 Maximum guaranty percentage 75% (over
$150,000)/85% if $150,000 or less
 Maximum maturity increased from 5 to 10
years (except Builder’s CAPLine, which is
limited by regulation to 5 years), this matches
the maturity for Working Capital term loans
104

105.  Eligibility
• The applicant must qualify under Standard 7(a) requirements.
• The applicant must sell on credit and create accounts receivable
 Use of Proceeds
• Finance short term working capital/operating needs.
• May refinance existing short-term revolving debt.
 Must NOT be used to
• Pay delinquent withholding taxes or similar trust funds (state
sales taxes, etc.), or for floor planning.
• To acquire fixed assets.
If lender discovers the line was used to finance a fixed asset; it must
refinance that portion of the line into an appropriate term facility no
later than 90 days after the discovery.
General Requirements

106. The cash cycle is the number of days a business takes from the time it
acquires inventory, provides a service, manufactures a product etc., until
it collects the cash from its sale of that inventory, service, or product. To
measure the length of the applicant cash cycle – compute turnover ratios
and convert into days.
Determining Cash Cycle Days
Receivable Turnover (ARTO) days
+
Inventory Turnover (ITO) days
-
Payable Turnover (APTO) days
=
Cash Cycle days

107. To determine the maximum loan amount, the lender
must follow its established policies and procedures
utilized on its similarly sized, non-SBA guaranteed
Commercial Lines of Credit.* The key is the correct
calculation of the business cash cycle.
OR
The lender may use the following formula:
Determining Loan Amount
Example
a.) Net Sales for prior year $1,000,000.00 Per year
b.) Divide prior year net sales by 365 $2,700.00 Per day
c.)
Multiply daily sales figure by number of days
to finance (whatever number is the business
cash cycle)
30 Days
d.)
The result will be the estimated working
capital needs
$81,000.00 Estimated Need

108. Why is it important to calculate CASH CYCLE
DAYS?
 Cash Cycle Days are included in the Loan Authorization.
 Used to determine date for final disbursement.
 Non-delegated processing will use cash cycle days as part of
their review process to determine if the loan amount requested
is reasonable.
 Maximum line amount tied to the borrower’s cash cycle.
 Principal payments tied to the borrower’s cash cycle.
Determining Cash Cycle Days

109.  If the lender is Using a borrowing base certificate (BBC)
• Lender must obtain a first lien on the applicant’s working /trading
assets (i.e., A/R, INV).
 If the lender is Not using a borrowing base certificate (BBC)
• Lender must obtain a first lien position on the working/trading assets
financed with the line.
• If the working/trading assets are insufficient to provide a 1:1 collateral
ratio, the lender also must take additional collateral to ensure there is a
1:1 collateral ratio.
• If business assets do not fully secure the loan, the lender must take
available personal assets of the principals as collateral to ensure there
is a 1:1 collateral ratio.
Collateral Requirements

110.  Determining collateral value:
• A maximum of 80% Advance Rate is allowed on eligible A/R.
• A maximum of 50% Advance Rate is allowed on eligible Inventory.
• Machinery and Equipment is allowed at 50% of Net Book Value
(NBV) or 80% of Orderly Liquidation Value minus any prior liens.
• Real estate is allowed at 85% of the value.
• An independent appraisal by a qualified individual must be obtained
by lender to value fixed assets greater than their NBV.
• After initial disbursement, lenders have unilateral authority to
increase or decrease the advance rate for receivables and/or
inventory by 5% above or below rate stated in Authorization.
Collateral Requirements

111. Examples of an ineligible receivable:
1) Any invoice more than 90 days past due. (exceptions are permitted with
SBA’s prior written concurrence)
2) A customer who is delinquent on more than 50% of its total outstanding
invoices. ALL accounts from that customer are ineligible.
3) All re-billed accounts - the practice of issuing a credit to a customer and re-
invoicing the obligations in the current billing cycle.
4) Foreign receivables not backed by documentation such as standby letters of
credit, credit insurance, etc.
5) Contra accounts such as an offsetting receivable and payable between the
borrower and one of its creditors.
6) Accounts due from affiliate companies.
7) Accounts that require subordination to other parties—such as Government
contracts that require an assignment of the projects receivables.
Collateral Requirements

112. Principal & Interest
Payment Requirements
 There is no provision for Interest only payments.
• Interest must be paid at least monthly
• Interest only payments for any period exceeding the
borrower’s cash cycle, seasonal cycle, contract final
payment date or project completion date are not
permitted.
 Principal payments are tied to the borrower’s cash cycle.

113. Level of Funds Control & Monitoring
 The level of funds control for a Working Capital CAPLine, whether a BBC is used or not,
is determined by the banking relationship the lender has with the borrower.
• If the lender has the borrower’s deposit accounts, the lender is not required to
utilize cash collateral accounts or other types of controlled accounts, but must
follow its established procedures for its similarly-sized, non-SBA guaranteed
commercial lines of credit to monitor payments received.
• If the lender does not have the borrower’s deposit accounts, then the lender must
utilize some form of controlled account as follows:
 The customer of the borrower can be instructed to send their remittances via joint
payee checks payable to lender and borrower, to the lender; or
 Lock box (bank account under lender control where borrower’s customers remit
payments for accounts receivable).

114.  When a BBC is used - the minimum monitoring
requirements are:
• Monthly – BBC; Aging of A/R & A/P; and INV (if advanced
against).
• Quarterly – Borrower prepared financial statements
• Annually – For $1,000,000 or less; credit review including a cash
flow analysis, concentration analysis, collateral analysis,
owner/guarantor credit review, and annual site visit.
• Annually – For more than $1,000,000; same as above plus Annual
Field Examination.
Level of Funds Control & Monitoring
Using a BBC

115.  When a BBC is not used - the minimum requirements
are:
Use financial covenants consistent with those used on
Lender’s similarly sized, non-SBA guaranteed commercial lines
of credit – Tested Quarterly, Semi-Annually or Annually.
Annually:
• At a minimum; conduct a credit review including a cash flow analysis,
collateral analysis to ensure there is a 1:1 collateral ratio,
owner/guarantor credit review, and annual site visit.
• For $1,000,000 or less; obtain borrower prepared financial statements
and tax returns.
• For more than $1,000,000; obtain compiled, reviewed or audited
financial statements and tax returns.
Level of Funds Control
Not Using a BBC – 1:1 collateral

116.  Annual Field Examination - for loans more than
$1,000,000
• Must be conducted by the lender’s staff or a 3rd party.
• Complete a physical verification of the assets which compose the
BBC, including a sampling of the assets.
• At a minimum, an examination must be conducted prior to the
initial disbursement and annually thereafter.
• The lender should describe the level and frequency of
examinations in the credit memorandum based on the quality of
the records, risk profile of the borrower, and seasonality of the line.
Level of Funds Control & Monitoring

117. Application Process
 For PLP and non-Delegated loans- use SBA Forms 1919 and 1920SX
Parts B&C. The lender should also use their own documents including
the Credit Memorandum. E-Tran submission for SBA approval is
required.
 Include comment if lender will use BBC or 1:1 collateral ratio.
 Include comment on use of deposit account or controlled account.
 Include cash cycle days used to determine short term working capital
need.

118. Contract CAPLines Program—Use of Proceeds
 Proceeds can be used to finance all costs (excluding profit), previously only
labor and materials.
 Contract CAPLine proceeds may not be used for:
 permanent working capital,
 to acquire fixed assets,
 to pay delinquent taxes or similar funds held in trust (directly or
indirectly),
 to finance a contract in which significant performance has already begun,
 for change of ownership
 Floor plan financing;
 to cover any mark-up or profit;
 to finance the performance of another contract or sub-contract; or
 in repayment of a different contract or sub-contract.
118

119. Contract CAPLines Program--Collateral
 Assignment of Contract Proceeds:
 Subject to the exception noted below, prior to initial disbursement on any Contract CAPLine, the
entity the borrower has entered into the contract with must be advised in writing by both the
lender and borrower that an assignment of the contract proceeds is required. Such assignment
must be in place before any disbursement for a particular contract is made and include a provision
for the lender’s right to receive all payments from the third party. The lender must receive written
acknowledgement from the third party.
 Exception to the Assignment of Contract Proceeds: An assignment of the contract proceeds
may be foregone, if at least two of the following conditions are met:
 The term of the contract being financed is 12 months or less;
 A successful track record between the borrower and the contracting authority exists
relative to the same or reasonably similar contracts. (The definition of a “successful track
record” includes but is not limited to, any prior contractual arrangement between the
subject parties, where the responsibilities of each party under the contract were met to the
satisfaction of all parties to the contract.);
 Financial analysis of historical income statements and/or tax returns and pro-forma
financial statements show that the applicant has a Debt Service Coverage ratio that exceeds
1:1;
 All contract proceeds are paid directly to the lender by the contracting authority or, in the
instance where a performance bond is in place, a Funds Control (or escrow or third party
servicer) procedure is implemented; or
 There is other available and worthwhile collateral pledged to secure the line by either the
borrower or any owner/guarantor.
119

120. Contract CAPLines Program—Eligible Contracts and
Purchase Orders
 A contract between a prime and subcontractor, a contract with Performance bonds,
and a purchase order is eligible for financing under Contract CAPlines provided the
lender satisfies the section 2 (a) on page 218 of the SOP 50 10 5(F) and satisfies the
following:
 Prime and Subcontractor Contracts: a contract between a Prime and
Subcontractor is eligible to be financed with a Contract CAPLine, if at least two of
the following conditions are met:
 Both the Prime and the Subcontractor have favorable credit ratings based on an
acceptable rating agency (e.g., Builders Industry Credit Association “BICA”);
 There is a successful track record between the Prime contractor and the
Subcontractor (borrower);
 There is a successful track record between the Prime contractor and the
contracting authority;
 The Contract CAPLine amount is less than $300,000;
 The term of the contract is 12 months or less;
 The financial analysis of historical income statements and/or tax returns and pro-
forma financial statements show that the applicant has a Debt Service Coverage
ratio that exceeds 1:1; or
 There is other available and worthwhile collateral pledged by either the borrower
or any owner/guarantor.


121. Contract CAPLines Program—Eligible Contracts and
Purchase Orders
 Contracts with Performance Bonds: a contract requiring a Surety’s performance
bond may be eligible for a Contract CAPLine provided the lender perfects a UCC
security interest in the contract proceeds.
 SBA recognizes the following conditions may be necessary to effectuate the
transaction where a contract requires a Surety’s performance bond:
 The lender’s perfected UCC security interest in the contract proceeds will be
subordinate to the cost reimbursement claim of the Surety; and
 The Surety may require that a funds control facility be executed. The funds
control facility would disburse directly to suppliers and laborers. The
contracting authority will remit contract proceeds directly to the funds control
facility, which will remit payment to the lender.
 Purchase Orders under a Master Agreement: Purchase Orders (PO) may be
substituted for a formal contract, provided the following conditions exist:
 The PO is issued to the borrower under a Master Agreement; and
 The combination of the PO and the Master Agreement constitute a binding
agreement.

122.  Thank You!
 Q & A
 Anne.Hunt@sba.gov
 617- 565- 5577
 Gregory.Gould@sba.gov
 401-528 -4561
 Darrell.Dante@sba.gov
 617 -565 -5169