Small Business Lending with the SBA

By: Dan Warren, Commercial Lending

Small Business LendingSmall Business Lending

Small Business defined as total annual Small Business defined as total annual receipts up to $6.5 million for retail trade.receipts up to $6.5 million for retail trade.

Not for Profit organizations are ineligible for Not for Profit organizations are ineligible for SBA financing. SBA financing.

Loan NeedsLoan Needs : : Working capital lines of creditWorking capital lines of credit Business acquisitionsBusiness acquisitions Real Estate purchases/refinancesReal Estate purchases/refinances Equipment financing Equipment financing

Lender QuestionsLender Questions

What is the purpose or use of the funds?What is the purpose or use of the funds? What collateral will secure the loan?What collateral will secure the loan? How long has the business been operating?How long has the business been operating? What products or services are produced?What products or services are produced? Who is your competition?Who is your competition? What is management’s expertise?What is management’s expertise? Management comments on profit margins and Management comments on profit margins and

revenue trends.revenue trends.

Business PlanningBusiness Planning

A written business plan will help your A written business plan will help your lender:lender:

Define your businessDefine your business Identify your goalsIdentify your goals Allocate resourcesAllocate resources View financial projectionsView financial projections

Writing the PlanWriting the Plan

What goes in a business plan?What goes in a business plan?• Description of the businessDescription of the business• MarketingMarketing• FinancesFinances• ManagementManagement• Addenda – should include an executive Addenda – should include an executive

summary, supporting documents, and summary, supporting documents, and financial projectionsfinancial projections

Preparing and Presenting a Loan Preparing and Presenting a Loan ProposalProposal

Provide a written description of your business:Provide a written description of your business: Type of organization (LLC, S-Corp, C-Corp, Partnership)Type of organization (LLC, S-Corp, C-Corp, Partnership) Date of informationDate of information LocationLocation Product or serviceProduct or service Brief historyBrief history Proposed Future OperationProposed Future Operation CompetitionCompetition CustomersCustomers SuppliersSuppliers

Other items needed:Other items needed:

Management ExperienceManagement Experience: resumes of each : resumes of each owner and key management members.owner and key management members.

Loan RepaymentLoan Repayment: brief written statement : brief written statement indicating how the loan will be repaid, including indicating how the loan will be repaid, including sources and time requirements. Cash flow sources and time requirements. Cash flow schedules, budgets, and other appropriate schedules, budgets, and other appropriate information should support this statement.information should support this statement.

CollateralCollateral: list real property and other assets to : list real property and other assets to be held as collateral.be held as collateral.

Other items as they apply…Other items as they apply…

Lease (copies of proposal)Lease (copies of proposal) Franchise AgreementFranchise Agreement Purchase AgreementPurchase Agreement Articles of Incorporation or OrganizationArticles of Incorporation or Organization Plans, Specifications (if new construction)Plans, Specifications (if new construction) Copies of LicensesCopies of Licenses Letters of ReferenceLetters of Reference Letters of IntentLetters of Intent ContractsContracts Partnership AgreementPartnership Agreement

Loan Types for BusinessesLoan Types for Businesses

Conventional FinancingConventional Financing – less – less documentation, shorter terms, higher documentation, shorter terms, higher down payment requirements, no SBA down payment requirements, no SBA guarantees for lenderguarantees for lender

Small Business Administration (SBA) Small Business Administration (SBA) FinancingFinancing – more flexibility, increased – more flexibility, increased documentation requirements, partial documentation requirements, partial guarantees for lender in case of defaultguarantees for lender in case of default

Typical Documentation RequestTypical Documentation Request

3 years business and personal tax returns3 years business and personal tax returns Year-end financial statements :Year-end financial statements :

Income StatementIncome Statement

Balance SheetBalance Sheet Personal Financial StatementPersonal Financial Statement Proforma statements (startups)Proforma statements (startups) Accounts Receivable & Accounts Payable Accounts Receivable & Accounts Payable

Aging ReportsAging Reports Applicable SBA Forms Applicable SBA Forms

Loan Decision CriteriaLoan Decision Criteria

Business and Personal Cash FlowBusiness and Personal Cash Flow Personal Credit HistoryPersonal Credit History Leverage (Debt to Worth)Leverage (Debt to Worth) Legal PurposeLegal Purpose LiquidityLiquidity Sufficient CollateralSufficient Collateral Loan StructureLoan Structure

SBA SBA ExpressExpress Program Program Maximum Loan Size - $350,000 Maximum Loan Size - $350,000 Maximum Loan Term – 7 yearsMaximum Loan Term – 7 years Rate of Interest – Prime rate basedRate of Interest – Prime rate based Guaranty Fee – 2 to 3% of guaranteed Guaranty Fee – 2 to 3% of guaranteed

amount passed on to the SBAamount passed on to the SBA Fees – $1000 packaging feeFees – $1000 packaging fee Job Creation Requirement - NoneJob Creation Requirement - None Use of funds – primarily working capital, Use of funds – primarily working capital,

and equipment needsand equipment needs

SBA 7A ProgramSBA 7A Program Maximum Loan Size - $2 million Maximum Loan Size - $2 million Required Down Payment – 10% (min. 30% for Required Down Payment – 10% (min. 30% for

start ups)start ups) Maximum Loan Term – Up to 25 years for real Maximum Loan Term – Up to 25 years for real

estateestate Rate of Interest – Prime rate basedRate of Interest – Prime rate based Balloon Payment - NoneBalloon Payment - None Guaranty Fee – Currently waived through Guaranty Fee – Currently waived through

12/31/0912/31/09 Job Creation Requirement - NoneJob Creation Requirement - None Use of funds – business acquisition involving Use of funds – business acquisition involving

real estate, working capital, and equipment real estate, working capital, and equipment needsneeds

Benefits of 7A ProgramBenefits of 7A Program

Smallest level of equity investment Smallest level of equity investment requirementrequirement

Longest amortization provides smallest Longest amortization provides smallest possible monthly payment possible monthly payment

Shortest prepayment penalty period with Shortest prepayment penalty period with the ability to prepay 25% without penaltythe ability to prepay 25% without penalty

No job creation commitmentNo job creation commitment

Best Used For…Best Used For…

Rapidly growing small business or Rapidly growing small business or business acquisitions involving real estatebusiness acquisitions involving real estate

Companies refinancing existing higher rate Companies refinancing existing higher rate or shorter term loans.or shorter term loans.

SBA 504 ProgramSBA 504 Program

Typically, a 504 project includes a loan Typically, a 504 project includes a loan secured with a senior lien from a private-secured with a senior lien from a private-sector lender covering up to 50% of the sector lender covering up to 50% of the project cost, a loan secured with a junior project cost, a loan secured with a junior lien from the CDC/SBA 504 (backed by a lien from the CDC/SBA 504 (backed by a 100% SBA-guaranteed debenture) 100% SBA-guaranteed debenture) covering up to 40% of the costs, and a covering up to 40% of the costs, and a contribution of at least 10% equity from the contribution of at least 10% equity from the small business being helped.small business being helped.

SBA 504 HighlightsSBA 504 Highlights

Maximum Loan Size - $2.0 million ($4.0 million for small Maximum Loan Size - $2.0 million ($4.0 million for small manufacturers)manufacturers)

Required Down Payment – 10% Required Down Payment – 10% Maximum Loan Term – 20 yearsMaximum Loan Term – 20 years Rate of Interest – Fixed rate for 10 to 20 yearsRate of Interest – Fixed rate for 10 to 20 years Balloon Payment – NoneBalloon Payment – None Assumable by qualified applicantsAssumable by qualified applicants Guaranty Fee – Currently waived through 12/31/09Guaranty Fee – Currently waived through 12/31/09 Job Creation Requirement – one job must be created for Job Creation Requirement – one job must be created for

every $65,000 of loan debenture amountevery $65,000 of loan debenture amount Use of funds – to be utilized for real estate and major Use of funds – to be utilized for real estate and major

equipment purchasesequipment purchases

Benefits of 504 ProgramBenefits of 504 Program Longest term of fixed interest rateLongest term of fixed interest rate Larger loan amountsLarger loan amounts Reduced amount of equity injection amount from Reduced amount of equity injection amount from

that of conventional loanthat of conventional loan

Example: $3MM purchase of office buildingExample: $3MM purchase of office building

50% - $1.5MM conventional loan50% - $1.5MM conventional loan40% - $1.2MM SBA 504 (through CDC/Bank)40% - $1.2MM SBA 504 (through CDC/Bank)10%10% - - $300M$300M equity injection from borrower equity injection from borrower100% - $3MM Total Project Cost100% - $3MM Total Project Cost

Best Used For…Best Used For…

Mature companies that are not as likely to Mature companies that are not as likely to outgrow the acquired facility or sell the outgrow the acquired facility or sell the company and real estate for a longer company and real estate for a longer period of time.period of time.

Conventional Bank FinancingConventional Bank Financing

Maximum Loan Size – N/A Maximum Loan Size – N/A Required Down Payment – 20% in most casesRequired Down Payment – 20% in most cases Maximum Loan Term – Up to 20 yearsMaximum Loan Term – Up to 20 years Rate of Interest – Fixed rate for 3 to 10 yearsRate of Interest – Fixed rate for 3 to 10 years Balloon Payment - YesBalloon Payment - Yes Closing Points – 1% of loan amountClosing Points – 1% of loan amount Job Creation Requirement - NoneJob Creation Requirement - None Use of funds – business acquisition involving Use of funds – business acquisition involving

real estate, working capital, and equipment real estate, working capital, and equipment needsneeds

Benefits of Conventional FinancingBenefits of Conventional Financing

Fixed rates availableFixed rates available Reduced amount of feesReduced amount of fees Provides smaller prepayment penaltyProvides smaller prepayment penalty Larger equity investment will most likely Larger equity investment will most likely

result in smaller monthly paymentsresult in smaller monthly payments

Best Used For…Best Used For…

Mature companies that possess a Mature companies that possess a substantial level of capital to fund a larger substantial level of capital to fund a larger portion of the real estate acquisition.portion of the real estate acquisition.

Questions???Questions???

Please call me to discuss your loan Please call me to discuss your loan request. I would be happy to assist request. I would be happy to assist

you!!you!!

480-905-4072480-905-4072