W.P.A.S.G.L. Western Pennsylvania Association of SBA-Guaranteed Lenders

1. W.P.A.S.G.L. Western Pennsylvania Association of SBA-Guaranteed Lenders

2. The Competition for Your Borrower’s Cash - Global Cash Flow Analysis

3. Objectives • SBA Requirement • Terminology/Process • Sample analysis-Field Underwriting

4. Disclaimer (a statement that is meant to prevent an incorrect understanding) • Your Institution’s Credit Officer is 100 % Correct !

5. Avowal(an open declaration or acknowledgment) • 50% of the Time!

6. SBA SOP 50 10 5(F) Requirements • (c) The Small Business Applicant’s debt service coverage ratio exceeds 1:1 on a historical or projected cash flow basis; and • (d) With the exception of loans under $50,000, the Small Business Applicant’s global cash flow coverage ratio exceeds 1:1 on a historical basis or, projected cash flow basis. Lender must document in the loan file the definition or formula used to calculate global cash flow; and • (e) Owner/Guarantor analysis, including personal financial statements, consistent with lender’s similarly-sized non-SBA guaranteed commercial loans. 2. For Standard 7(a) loans greater than $350,000 and up to and including $5,000,000: • Lenders analysis must demonstrate the Small Business Applicant’s ability to repay the loan from the cash flow of the business by documenting the following: Loans from $350,001 to $5 million • c) A financial analysis of repayment ability based on historical financial statements (including balance sheet with debt schedule and income statement) and/or tax returns (if an existing business) and detailed projections, including the supporting assumptions: • 1. Analysis of historical cash flow should demonstrate total debt service coverage after the SBA loan; • 2. Define operating cash flow (OCF) as earnings before interest, taxes, depreciation and amortization (EBITDA); • 3. Analysis must document additions and subtractions to cash flow such as the following: • (a) Unfunded capital expenditures; • (b) Non-recurring income; • (c) Expenses and distributions; • (d) Distributions for S-Corp taxes; • (e) Rent payments; • (f) Owner’s Draw; and/or • (g) Assessment of impact on cash flow to/from any affiliate business. • 4. Debt service (DS) is defined as required principal and interest payments on all business debt inclusive of new SBA loan proceeds. 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:

7. What does that mean? • (a) Unfunded capital expenditures % of depreciation is commonly used • (b) Non-recurring income; Gain on sale of assets, Capital gains for guarantor, Lottery winnings, insurance proceeds et al • (c) Expenses and distributions; Moving, and any other extra-ordinary Expenses. Document in credit write up • (d) Distributions for S-Corp taxes; Prior Period net income is basis for analysis • (e) Rent payments; EPC • (f) Owner’s Draw; and/or • (g) Assessment of impact on cash flow to/from any affiliate business Is my business owner Warren Buffet or Bernie Madoff?

8. IS IT DIFFICULT?

9. Constructing Global Cash Flow • Borrower Cash Flow + related entities+ personal guarantors=Global Cash Flow • Business EBITDA • Related Entities EBITDA (for ownership greater than 50%) • Guarantors Excess cash flow surplus Must be formulaic • EPC Rent add back-Triple net lease? Excess rents? Can be incorporated into Guarantor analysis

10. Deducting Living Expenses • Should be supported and utilized by the institution • RMA has articles and information to refer to if in doubt

11. Operating Company-income statement

12. Operating Company-Balance Sheet

13. Debt Schedule

14. Guarantor Balance Sheet

15. Guarantor Cash Flow

16. Donald Trump Analysis

17. Global Cash Flow Results

18. Analysis

19. Questions? Good Luck with your brackets!