U.S . Small Business Administration

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

2. # 3 in 7a loans (3/21/14)

3. # 3 overall (7a & 504 combined) 3/21/14 As of 3/21/14 # 1 in loans $150,000 and less!

4. Break Out of MA lending by units, (3/21/14)

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

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. PREMISE OF SBA LENDING “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.”

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 CenterLocated 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. 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 www.sba.gov/ma

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, buildingsand 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. Determination of Eligibility 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).

23. 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. Maximum Maturities • 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

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. AFFILIATES 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

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 Refinance • Timing of 1502 Reporting • Prior Loss to the Government • Debt Service Coverage Ratio Requirements • Credit Memo Requirements • Collateral

38. What haschanged?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 number is issued.

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 Changeseffective 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. Credit Scores Will Predict Risk More Accurately and Simply Than Complex Underwriting • 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. Small Business Credit Scores Accurately Predict Purchase Below 140: 21% Above 140: 3.7% Source: SBA Loan/Lender Monitoring System. Sample Users of Small Business Credit Scores This Score Suite is an Industry-Standard Decisioning Tool • 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. Source: Dun & Bradstreet, Fair Isaac Corp.

47. SBSS scores use commercial and consumer data to predict purchase risk Example Qualified ProfileSBSS Score 178 Example Disqualified ProfileSBSS Score 119 Credit bureau Business bureau Application Financials 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 business Once 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. Credit Memo 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

50. Credit MemoContinued 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