Documenting, closing and funding the sba loan lerch early may 2012

FUNDAMENTALS OF
SBA LENDING:
DOCUMENTING, CLOSING
AND FUNDING THE SBA
LOAN
Alison W. Rind
Lerch, Early & Brewer, Chtd.
www.lerchearly.com May 16, 2012

Overview
Overview of 7(a) Programs
Documenting SBA Loans
Closing & Funding SBA Loans
Servicing

2
© Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com

I.A. Programs Available

3 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com

7 (a) Loan Programs

 Standard 7(a) Loan Processing
 Certified Lender Program (CLP)
 Preferred Lender Program (PLP)
 SBA Express
 PatriotExpress
 Export Express

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I.B. Types of Processing


7 (a) Loans
 Standard 7(a)/CLP Loans
 Lender submits full credit analysis to SBA
 SBA approves loan for both credit and
eligibility
 Normal 6-10 day turnaround

 PLP Loans and Express Loans
 Must have preferred status
 Lender approves loan for both credit and
eligibility
 SBA approval normally received within 24 hours

6

I.C. Purpose-Use of Proceeds


7 (a) Lending

 Proceeds may be used by eligible
businesses for following purposes:
 Working capital
 Furniture and fixtures
 Machinery and equipment
 Purchase and construction of land and building
 Business acquisition
 Refinancing of existing debt

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Guidance on 7 (a)
Debt Refinancing
 Long term debt with demand note or balloon
payment
 Revolving lines of credit (both short and long
term) where original lender is unwilling to renew
line or borrower is restructuring to obtain lower
interest rate/longer term
 Debt with maturity not appropriate for purpose
of financing
 Debt that does not fit other refinancing
categories, but which lender believes no longer
meets needs of borrower
 However applications for this exception may be processed only through
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standard 7(a) procedures.

Change of Ownership

 SOP provides that small business
applicant may use loan proceeds for
change of ownership

10

Change of Ownership

100% purchase (“either an asset
purchase or a stock redemption”)
One or more existing owners are
redeeming stock of selling owner
resulting in 100% by purchasing
owners
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I.D. Eligibility


7 (a) Eligibility

 For profit
 Operating business
 Located in U.S.
 Small
 Must look at affiliates to determine size
 Demonstrate need for desired credit
 Credit not available elsewhere
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7 (a) Ineligible Businesses (e.g.)
 Nonprofits  Businesses deriving
 Financial businesses more than 1/3 income
engaged in lending from gambling
 51% owned by non-US  Pyramid sales
citizens or resident distribution plans
aliens  Businesses engaged in
 Passive (investment) illegal activities
businesses  Speculative businesses
 Life insurance
companies
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7 (a) Ineligible Businesses (con’t)
 Private clubs that limit  Businesses that present
membership other than live performances of a
capacity prurient sexual nature
 Businesses owned by or derive 5% of gross
persons of poor income through sales of
character/on products or services of
probation/parole a prurient natures
 Franchises exhibiting  Businesses that
affiliation with defaulted on federal
borrower loans or federally
assisted financing
resulting in a loss

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I.E. Loan Terms


7 (a) Standard Terms

 Standard 7(a) and CAPLines 75%
guaranty (85% if loan ≤ $150K) net
loan amount: $5 million
 SBA Express 50% guaranty,
maximum loan amount: $350K
 Patriot Express 75% guaranty (85%
if loan ≤ $150K): $500K
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7 (a) Maximum Maturity
 Working capital and inventory: Up to 10 years
 FF&E: 10 years unless useful life exceeds 10
years, then many be longer
 Real Estate: Up to 25 years
 SBA Express: 7 years if revolving line, including
term out
 CAPLines: Up to 10 years (Builder CAPLine: 5
years)
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7 (a) Interest Rates

 Prime plus 2.75% (over $50K) or
LIBOR Equivalent (or optional peg
rate)
 SBA Express Prime (LIBOR equivalent)
plus 4.5% (over $50K)
 Fixed Rates published monthly
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Guaranty Fees & Annual Service Fees

Loan % of Guaranteed
Portion
≤$150K 2%
$150K-$700K 3%
$700K-$5M 3.5% up to $1M, then
3.75% over $1M
Short term loans .25%
Ongoing fee charges

Fees

 Packaging
 Extraordinary Service Fees
 Out of Pocket Expenses
 Prohibited Fees


II.A. Credit Standards


Underwriting

 Lender must analyze each applicant
in commercially reasonable manner


Equity Requirements

 Amount
 Source
 Documentation


II.B. Collateral


Adequacy of Collateral

 All available collateral
 Liens on residences
 Assets owned by applicant’s spouse
 Guaranties


II.C. Appraisals & Environmental Policies


7 (a) Appraisals
 When collateral is new construction or involves
substantial renovation, appraisal must estimate what
market value will be at completion of construction
 Substantial renovation shall mean rehabilitation
expenses of more than 1/3 of purchase price or fair
market value at time of application
 After construction is completed, lender must obtain
statement from appraiser of “as-completed” value.
If value is <90% of original estimated value,
appraiser must state reason for change in value, e.g.,
changes in market conditions or deviations from
original plans
28

7 (a) Business Valuation
 If amount being financed minus appraised
value of real estate and/or equipment is
≤$250K, lender may perform own
valuation of business being sold
 If amount being financed minus appraised
value of real estate and/or equipment is
>$250K or if there is close relationship
between buyer and seller, lender must
obtain independent business valuation from
qualified source
29

CAPLine Collateral Requirements

 Working capital lines
 Borrowingbase
 No borrowing base

 Contract lines
 Builder CAPlines


SBA Express Collateral Requirements

 <$25K: No collateral
 >$25K: Follow same procedures as
lender for similar, non-guaranteed
loans


Environmental Investigations
 SBA requires lenders to submit
Environmental Investigation Reports to
SBA center processing an application
(except PLP)
 Iflender is processing application under
preferred lender status, loan file must include
all necessary environmental reports
 A Reliance Letter is required even if
Environmental Investigation Report is addressed
to lender

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II.D. Basic Loan Conditions &
Requirements


SBA Authorization
 Comply with all provisions
 Insurance requirements
 IRS transcripts
 Standby agreements
 Assignment of lien and landlord waiver
 Construction loan provisions
 Provisions for franchises
 Provisions for CAPLines
 Modifying authorizations

Insurance
 Hazard insurance
 Evidence of Insurance on Acord Form 27
 Builder’s risk
 Liability insurance
 Acord Form 25s
 Business interruption
 Worker’s compensation
 Law and ordinance
 Life insurance
 Title insurance

Landlord Waivers: Reason
 In some states, landlords have lien rights
covering unpaid rent, superior to
recorded bank's liens on tangible
property of tenant located on leased
premises
 Written landlord's waiver determines
priority of lien rights, controls access to
premises after default under lease, and
allows for orderly removal or sale of
collateral

Difficulty of Obtaining Landlord
Waivers
 Unless lease terms contemplate waiver, no
requirement on landlord to agree to anything
 Failure to obtain landlord's waiver is usually not
deal breaker
 Alternatives include requiring monthly proof
from borrower that rent is paid or decreasing
advance percentage to cover risk
 Begin discussion with landlord early so problems
can be identified and resolved


III.A. Collection & Review/Due Diligence


Borrower’s Name, Authority
and Signatures
 Determine exact name of borrower
 Name used in a personal or business context
may not be borrower's full and legal name
 In case of a corporate or partnership borrower,
establish authority of corporate officers or
partners, respectively, to enter into loan
transaction and to execute all loan documents
 Use of incorrect/unauthorized name or signature
may jeopardize bank's ability to collect
defaulted loan or bank's rights in any collateral


Also Verify

 Each signatory of loan document is
who he or she purports to be
 Person actually signs loan document
 Patriot Act Concerns


Collateral Due Diligence

 Security Interest
 Creation
 Securityagreement
 Proper parties
 Importance of exact entity names
 Importance of organizational situs

 Perfection
 Filing requirement

Proper Perfection of
Security Interests
 Crucial step in loan documentation
process
 Protects against third party claims,
trustee in bankruptcy, other creditors


Issues Re Proper Perfection
 Does Article 9 apply?
 What type of collateral is involved?
 Who is debtor?
 Is possession of collateral or filing required?
 Where to file?
 What should financing statement include?
 How to retain perfection?
 What impact of revised Article 9?

When In Doubt

 Because of technicalities involved in
correct content of financing statement
and severe consequences of error, seek
advice if any questions or uncertainties
arise
 When in doubt, file. Unless cost of filing
is a factor, always file financing
statement

III.B. Review of 3rd Party Reports


Title Insurance: Coverage
 Verify ownership of property
 Verify authority of owner to grant lien lender
 Identify liens, easements, covenants and other
encumbrances on property
 Insure priority of deed of trust
 Identify problems regarding property
boundaries and other issues shown by survey
 Insure access to property
 Insure marketability of property


Title Commitment

 Time to issue commitment
 Cantake several weeks to complete title
search and issue commitment
 Effective date of commitment
 Lag in recording times
 1 - 3 months or more

 Gap coverage

Exceptions from Coverage

 Schedule B-2 of commitment
 Easements, restrictive covenants,
deeds, etc.
 Beware of restrictions on use of
property
 Affirmative coverage
 Endorsements to title policy

Coverage Maintenance/
Enhancement – Endorsements Insure

 Access: access from a particular public
road
 Environmental liens: no liens securing
environmental cleanup costs
 Comprehensive: any breaches of
covenants or violation of easements and
other encumbrances will not cause
termination of lien of deed of trust

Title Instructions
 If terms of loan are modified to increase
burdens on borrower, title update
should be obtained and title policy
endorsed (amended) to protect against
intervening liens
 Counsel for bank will provide closing
instruction letter to title company that
tells title company what documents to
have executed and recorded and what
title policy must contain.

Title Instructions

 Failure of title company to follow written
instructions will give bank a claim
against title company for any losses
 Always obtain insured closing letter from
title insurance company that will provide
for claim against title insurance company
if title agent fails to follow bank’s
written instructions with respect to closing
and disbursement of loan proceeds

Surveys Generally Show

 Visual image of property’s boundaries,
placement of buildings, fences and other
structures on property
 Location of recorded and observed
easements and right of ways
 Names and widths of streets and
highways abutting property
 Monuments (markers) found or placed

Surveys Generally Include
 Character and location of walls, buildings and
fences within five feet of boundary lines
 Encroachments by or onto adjoining property,
streets, easements, and record setback lines, and
driveways or alleys on or crossing property
 Cemeteries and burial grounds disclosed in
process of surveying
 Ponds, lakes, springs or rivers bordering on or
running through property


Additional Survey Info

 Location drawing (not really a
“survey”)
 Boundary survey
 ALTA/ACSM survey


UCC Searches
 Search records in jurisdiction of
borrower’s formation or each jurisdiction
of borrower’s residence, if an individual
 What information may search reveal?
 Name differences
 Other creditors and lien holders
 Problems regarding lien priority
 Description of borrower’s assets
 Whether lien subordination will be necessary


III.C. Common Roadblocks


Change of Ownership
 In context of change of ownership, SBA takes
position that it cannot finance an individual's
acquisition of stock because such use of
proceeds would constitute payment or
distribution to or for benefit of acquiring
shareholder who is associate of small business
applicant.
 Accordingly, SOP was revised to remove
provisions allowing for individuals to purchase
stock of a business if individuals executed
note on joint and several basis with business
57

Collateral Conditions
 Make sure borrower is or will be owner of
pledged collateral
 What is borrower’s organizational structure?
 Does guarantor own collateral to be pledged?
 First lien in following business assets of borrower:
 Equipment; fixtures; inventory; accounts; instruments;
chattel paper; general intangibles; machinery, except for
automobiles
 Are there specific business assets to be listed?
 Patents and copyrights


IV.A. Monitoring


Follow Up on Post-Closing Items

 File reports
 Verify insurance
 Verify taxes


IV.B. Servicing Actions


SBA Servicing of Liquidation Actions

 Pre-initial disbursement
 Post-initial disbursement
 Unilateral actions
 SBA notification
 E-TRAN
 SBA approval needed

Additional Resources

 SBA Servicing and Liquidation Actions
7(a) Lender Matrix
 http://www.sba.gov/sites/default/files/Matrix_

 SBA Standard Operating Procedures
 http://www.sba.gov/about-sba-
services/7481/24141


Speaker

 Alison Rind is an attorney at
Lerch, Early & Brewer who
(301) 657-0750 represents commercial lenders
awrind@ in loan transactions and other
lerchearly.com commercial matters. These
include participants in SBA
and other government-
guaranteed lending programs.


For more information

Lerch, Early & Brewer, Chtd.
3 Bethesda Metro Center, Suite 460
Bethesda, MD 20814
(301) 986-1300
www.lerchearly.com

Thank you for your participation


Documenting, closing and funding the sba loan lerch early may 2012

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