7(a) Loan Guaranty Program

1. 7(a) Loan Guaranty Program April 10, 2019 Presenter – Betty Hill

2. WHO ARE WE? … AND WHAT DO WE DO? 7(a) LOAN GUARANTY PROCESSING CENTER (LGPC)

3. LGPC mission statement The mission of the Center is to efficiently process 7(a) loan guaranty applications and to provide assistance and oversight, as necessary, to lenders before and after submission.

4. 7a LGPC locations

5. LGPC Leadership Team Gregory Prichard Center Director Vacant Deputy Center Director,Hazard Annette May Deputy Center Director Betty Hill • Assistant CD, Policy Loan Processing Activities Customer Service Departments Eric Aylor • Loan Processing Team Supervisor Theresa “Teri” Hendrix Loan Modification Supervisor Kimberly Bury • Loan Processing Team Supervisor Bill Reed • Loan Processing Team Supervisor Brendell Givens • Loan Processing Team Supervisor Kristi Harris • LP Support Supervisor Customer ServiceLiaison/ 7a Questions eTran Support

6. Lgpc workflow Lgpc workflow The completeness of the submission package will impact the efficiency of the processing timeline.

7. Who Must use the lgpc Who Must use the lgpc

8. Who Must use the lgpc Who Must use the lgpc

9. WHAT SHOULD YOU SUBMIT TO THE LGPC? … AND HOW DO YOU DO IT?

10. Submission methods • SBA One or E-TRAN Origination • Create an application • Answer required questions • Verify data • Attach documents • Submit • Status will change from “Application in Process” to “Review Reviewer 1” • If the status is anything other than “Review Reviewer 1” the file will not transmit to the LGPC. • For questions regarding SBA One, contact Colson’s SBA One support services at SBA.One@bnymellon.comor 877-245-6159, Call Option 5 • For questions regarding E-TRAN, contact Ryan Gerald at ryan.gerald@sba.gov or Glenn Hannon at glenn.hannon@sba.gov • For general submission questions contact 7aQuestions@sba.gov

11. What needs to be included? What needs to be included? • * We suggest submitting the following forms to the appropriate Agencies as early in the application process as possible to avoid any unnecessary delays in the application process: Form 912 Statement of Personal History and Form G-845

12. What else should be included? What else should be included? * We suggest submitting the following forms to the appropriate Agencies as early in the application process as possible to avoid any unnecessary delays in the application process: Form 912 Statement of Personal History and Form G-845

13. Who needs to complete the form 1919? Who needs to complete the form 1919? Make sure that the current form is used and that each 1919 is signed and dated. • Make sure that each 1919 is initialed, signed and dated.

14. What should be covered in your Credit Memo? What should be covered in your Credit Memo?

15. Primary Screen-Out Reasons … AND HOW TO AVOID THEM

16. The top five categories The Top 5 categories account for 75% of the total Screen 2nd Quarter 2018

17. NumBer One… Credit Memo Incomplete • Collateral Shortfall not addressed • Life Insurance not addressed • Derogatory credit not addressed including • Delinquent Federal Debt • Use of Proceeds Unclear • Need for Working Capital not addressed • Schedule of Collateral Missing or Incomplete • Shareholder debt not placed on standby or not addressed • Draft Authorization conflicts with Credit Memo • Notes to be refinanced not clearly identified • Justification for refinance not properly addressed (Benefit to the Borrower) • Justification for Projections not addressed • Liquidity of 20% owners, their spouses and minor children not addressed

18. 2nd on the list… Financial Statements Missing/Incomplete • Affiliate financial statements missing/incomplete • Projections missing or assumptions not included • Borrower’s historical financial statements missing/incomplete • Personal Financial Statement Incomplete • Debt schedule missing/incomplete or doesn’t match balance sheet debt • Pro-forma Balance Sheet missing/incomplete • Seller financial statements missing/incomplete Make sure that current YTD Business Financials are no older than 120 days from submission to SBA Make sure the Personal Financial Statement is no older than 90 days from submission to SBA

19. 3rd on the list… Forms 1919 and 1920 • Forms are missing, incomplete or unsigned • Ownership identified does not total 100% • Other SBA loans are not identified on 1920 • Use of Proceeds on 1920 is incomplete or doesn’t match credit memo • Trade Name (dba) left blank when applicable on 1920 • Payment Amount and Rate Adjustment Frequency missed on 1920

20. 4th on the list… Debt Refinance • Copy of Notes to be Refinanced Missing • Transcripts for Same Institution Debt Refinance Missing • Benefit to Business Not Stated • Loan to be Refinanced on Reasonable Terms Not Met • 10% Improvement to Cash Flow Not Met • Same Collateral Position Required When Refinancing • Certification that Credit Card was Used for Business Purposes Missing and provide copy of most recent Credit Card statement

21. 5th on the list… Change of Ownership • Asset Purchase/Stock Purchase Agreement Missing • Equity injection not addressed/adequate • Third party Independent Business Valuation Missing/Unacceptable • Lender’s Internal Business Valuation Missing/Unacceptable • Change of Ownership Appears Ineligible • Payment to Associate • Finance amount not supported by business valuation

22. CHANGE OF OWNERSHIP

23. Change of Ownership • An asset purchase will be deemed a change of ownership and must comply with all of the Change of Ownership requirements if the Applicant(s) is purchasing all or substantially all of the assets of the Seller’s business and is continuing the operations of the Seller’s business. • Seller may not remain as an officer, director, stockholder or key employee of the business (short transitional period may be allowed) • Small business must either be the Borrower or a Co-Borrower

24. Change of Ownership Change of Ownership Between Existing Owners: A change of ownership between existing owners may be financed under the following circumstances: • An existing owner(s) of the small business is purchasing the ownership interest of another owner(s), resulting in 100% ownership of the business by the purchasing owner(s) • The small business is redeeming the ownership interest of an owner(s), resulting in 100% ownership of the small business by the remaining owner(s)

25. Change of Ownership “Creeping Control” • “SBA intentionally removed the prohibition on “creeping control” from the SOP with the original rewrite of the 50 10 (5) in August 2008 because as long as the remaining owners ended up with 100% of the ownership of the business, SBA did not care how it was allocated after the purchase.  That was a business decision that was left up to the business owners. 

26. Change of Ownership Change of Ownership Resulting in a New Owner: A change of ownership resulting in a new owner may be financed under the following circumstances: • A small business is purchasing 100% of the ownership interest in another business • An individual(s) who is not an existing owner is purchasing 100% of the ownership interest in a small business • A small business is acquiring another small business through an asset purchase • An Employee Stock Ownership Plan (ESOP) or equivalent trust is purchasing a controlling interest (51%) in the employer.

27. EQUITY INJECTION

28. Equity Injection • Start-Up • At a minimum, SBA requires an equity injection (borrower contribution) of no less than ten (10) percent of the total project costs for a start-up business. • SBA consider a business to be a “start-up” for the purpose of determining equity injection when it has been in operation (i.e., generating revenue from intended operations) for up to one year. • Total project costs include all costs required to become operational, regardless of the source of funds. • If the borrower is obtaining a term loan for working capital, it is considered part of the total project cost. • If the borrower is obtaining a separate line of credit, it is not considered part of the total project costs. There should be adequate working capital built into the project. The separate line of credit is to be used for ongoing operations.

29. Change of Ownership • SBA requires an equity injection of no less than 10 percent of total project costs. • Seller debt can be used to meet the injection requirement only if it is on full standby for the life of the SBA loan and it does not exceed half of the required equity injection. • The borrower can not make interest payments on the seller debt. Full standby requires that no principal or interest payments are made. Equity Injection

30. Change of Ownership - Partner Buyout • Significant changes to SOP 50 10 5(J) were made to this policy through SBA Policy Notice 5000-17057 effective April 3, 2018. • In the event the Lender is unable to document that both (1) and (2) on the next slide are satisfied, the remaining owner(s) must contribute cash in the amount of at least 10% of the purchase price of the business, as reflected in the purchase and sale agreement. Equity Injection

31. Change of Ownership - Partner Buyout • In order for a 7(a) loan to finance greater than 90% of the purchase price of a partner buyout: • the remaining owner(s) must certify that he/she has been actively participating in the business operation and held the same ownership interest in the business for at least the past 24 months (Lender must include in the credit memorandum confirmation that the borrower has made the required certification and retain such certification in the loan file); and • the business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership. Equity Injection

32. Partner Buyout Questions for Requirement 1: • Does the certification have to be submitted to the LGPC with the application? • No, the lender must include in the credit memorandum confirmation that the borrower has made the required certification and retain such certification in their loan file. • What if the remaining owners have change their percentage of ownership in the past 24 months? • As long as the ownership interest has increased it is acceptable. The ownership interest cannot have decreased. • What if one remaining owner has been actively participating in the business for 24 months and one has not? • All remaining owners must meet the requirement or they must contribute cash in the amount of at least 10% of the purchase price of the business. Equity Injection

33. Equity Injection • Partner Buyout Questions for Requirement 1: • Is an interim balance sheet acceptable if it is not the current quarter? • Yes, an interim balance sheet is acceptable. • Can a real estate or equipment appraisal value be used to calculate the debt-to-worth ratio? • No, the ratio must be based on the historical balance sheets.

34. Acceptable Injection Sources: • Cash that is not borrowed. • Cash that is borrowed through a personal loan to the business owner with repayment from a source other than the cash flow of the business. • Assets other than Cash - Lenders must carefully evaluate the value of assets other than cash that are injected by owners. An appraisal or other valuation by an independent third party is required if the valuation of the fixed assets is greater than the depreciated value (net book value). A valuation of the fixed assets provided as part of a business valuation will not meet these requirements. • Standby debt - Only debt that is on full standby (no payments of principal or interest for the term of the SBA guaranteed loan) may be considered as equity for SBA’s purposes. A copy of the note must be attached to the standby agreement. Equity Injection

35. Equity Injection • Unacceptable Injection Sources: • Value or cost of education • Funds that are borrowed and do not meet the exception noted on the prior slide.

36. LENDER RESOURCES

37. SBA.GOV

38. SBA.GOV …FOR PARTNERS Hover over the Lenders box and click on 7(a) Loan Program

39. SBA.GOV …FOR PARTNERS Scroll to the bottom of the page to Loan Servicing and Processing Centers

40. SBA.GOV …LGPC Sba.gov …LGPC

41. Thank You!