SBA Lending Matters Newsletter
A Word from Arne

The SBA completed a record year in FY 2011 by providing $30.5 billion in loan support to more than 60,000 small businesses. Funding for the new fiscal year appears to be adequate to meet the needs of small business lenders.

Last week, President Obama announced that the chief of the Small Business Administration is now a member of the White House cabinet, reviving a structure last employed by President Clinton. Karen Mills, Administrator of the SBA, has assumed the cabinet post. I have had the opportunity to meet with Ms. Mills, and have found her to be a very effective advocate for small businesses. She impresses me as a tireless proponent of making much-needed capital accessible to small businesses. Her position on the cabinet is strongly supported by two key Senators – Olympia Snowe, Republican from Maine; and Mary Landrieu, Democrat from Louisiana. I also support this move. Those of us involved in small business financing know that job creation – closely related to accessible capital – will be the catalyst that leads our country out of the current economic downturn.

On January 20, President Obama also asked Congress to streamline government by merging six existing agencies into one agency dealing with trade and commerce. The proposed agency would include parts of the Commerce Department, the Small Business Administration, the Office of the U.S. Trade Representative, the U.S. Export-Import Bank, the Overseas Private Investment Corporation, and the Trade and Development Agency. This consolidation is intended to eliminate redundancy and inefficiencies.  We applaud these kinds of efforts to make government more efficient.

As always, please call upon us here at Holtmeyer & Monson with any SBA-related question or issue you may encounter. As a qualified Lender Service Provider, we can serve as your out-of-house SBA loan department. Holtmeyer & Monson has been chosen by the Independent Community Bankers of America to be its Preferred Service Provider of SBA lending services, and we are happy to fill this need for your institution.

Featured Article

Best Practices: Collateral Options for Working Capital CAPLines
By Kimberlee Knopf, Esq., Starfield & Smith, P.C.
http://www.starfieldsmith.com

The new SBA Working Capital CAPline program offers lenders a powerful new tool to meet the working capital needs of their borrowers. However, it is critical that lenders understand the collateral requirements under this program to participate in a compliant manner. Pursuant to SOP 50 10 5(D), the collateral required for a Working Capital CAPLine is based upon whether or not Lenders are disbursing under the line through a borrowing base, or not.

If Lender intends to fund the CAPline based upon a borrowing base certificate (which certificate must be delivered by a Borrower monthly, or on a more frequent basis to conform to Lender's internal policy and procedures for similarly situated non-SBA borrowers), then the Lender is only required to obtain a first priority lien and security interest in borrower's working assets, namely, accounts receivable and inventory. The advantage to proceeding under a borrowing base is that fewer assets are required to be pledged as collateral for the loan; the disadvantage is that monitoring a borrowing base requires much more intensive monitoring on the part of the lender.

For various reasons, a Lender may not wish to disburse working capital funds through a borrowing base, and in such event, the Working Capital CAPLine is to be secured on a 1:1 collateral ratio based upon the maximum usage of the line of credit. Lenders must first analyze the working/trading assets of Borrower and if such assets are insufficient to meet the 1:1 test, then additional business assets and personal assets of the principals must be taken to fully collateralize the line of credit. If, after taking all available assets, lender is unable to achieve a 1:1 collateral ratio, the maximum amount of the Working Capital CAPline must be reduced to meet the 1:1 requirement.

SOP 50 10 5(D) has added further clarification with respect to determining the 1:1 collateral ratio for non-borrowing base Working Capital CAPlines. Unless otherwise indicated, business assets are to be discounted based upon the Net Book Value of such assets as listed on Borrower's financial statements. However, it is noted that this valuation method is inconsistent with the adequate collateral requirement in SOP 50 10 5(D) at p. 185 requiring lenders to value business operating and trading assets at not more than 10% of current book value due to such assets having a "negligible value in a liquidation." In any event, after determining the Net Book Value of the working capital assets, Lenders must then consider the Net Book Value of such assets as a percentage of the maximum line of credit. After subtracting ineligible receivables, Accounts Receivable must be less than or equal to 80% of the maximum line of credit while Inventory can not comprise more than 50% of the maximum line of credit.

If the working capital assets do not fully secure the Working Capital CAPLine, then Machinery and Equipment should be considered at either 50% of Net Book Value or 80% of Orderly Liquidation Value, less prior liens. A conservative approach when selecting between these options would be to utilize the lesser of the two values.

Lastly, Real Estate can be collateral for the Working Capital CAPLine using 80% of the value of such Real Estate, determined in accordance with Chapter 4, Paragraph II.C. of Subpart B. In the event Lender determines that the value of the Real Estate securing the line is in excess of its Net Book Value, then Lender must obtain an independent appraisal to support the higher valuation in accordance with Chapter 4, Paragraph II.C.3. of Subpart B. For more information about Collateral Options for Working Capital CAPLines, please contact Kim at [email protected] or 267-470-1188.


Regulatory Corner

Owner’s Life Insurance Requirements
We are often asked what the SBA requires concerning the assignment of life insurance policies covering business principals. The following are details included in SOP 50 10 5 (D) issued by the SBA last fall:

The lender must determine if repayment of the loan depends on an owner’s active participation in the business. In other words, if the owner dies, will the business operations be adversely affected and the loan default? If this is the case, the lender must require life insurance that is consistent with the size and term of the loan. The lender must obtain a collateral assignment, listing the lender as assignee, for the insurance. In determining the appropriate amount of life insurance needed, the lender may factor in the amount and type of collateral available to repay the loan upon the borrower’s death.  The lender may determine that no life insurance is necessary due to the adequacy of collateral and/or the presence of secondary sources of repayment. This determination must be documented by the lender in the credit memo. If the lender determines that life insurance is not necessary and a loss on the loan results from the death of the owner, the lender will be responsible for the loss. Please call your Holtmeyer & Monson representative for additional details on this issue.

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SBA Hot Topic

The new SOP includes requirements for GP & CLP program loans. As of 10-01-11, prior approval must be obtained from the SBA for any changes to the loan authorization -- including changes to the use of loan proceeds -- until the final disbursement of loan proceeds. This SOP effectively nullifies the portion of the SBA servicing matrix that indicates changes can be made after initial disbursement of the proceeds.

 

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