SBA Express Loan Program: Flexible Financing for Small Businesses

1. SBA Express Basics

2. New SOP 50 10 5 (K) is out and effective April 1, 2019 Subpart B pages 88 - 260

3. Section 1:What is SBA ExpressandWhy should you use it?

4. SBA Express Loan Program • Loan Types: Revolving Lines of Credit or Term Loans • Maximum Loan Amount: $350,000 • Maximum Guaranty: 50% • Maturities: • Revolving Lines of Credit: • Maximum 10 Years (5 years revolving 5 years term-out period) • Term Loans: • Working Capital: 5-10 Years • Machinery & Equipment: 5-10 Years • (not to exceed life of equipment) • Real Estate: Maximum 25 Years

5. Benefits of SBA Lending For Lenders: • Reduce bank risk • Allow your bank to be more competitive • Acquire and retain customers by providing longer amortizations, lower down payments and no prepayment penalties on loans less than 15 years • Increase fee revenue from secondary market sales For Borrowers: • Provide financing for a Start Up • Helps to mitigate insufficient collateral • Provide longer amortizations, lower down payments and no prepayment penalties on loans less than 15 years - NO balloon structures • Provides a flexible financing option when funding would not otherwise be available

6. When does a bank use SBA? • Start up businesses • Lack of collateral • Reliance on projections • Lack of down payment / equity • Change of Ownership • Need a longer term to support debt coverage requirements • Riskier Industries • Uneven historical revenues or profits

7. What is considered a Small Business? • The SBA/Federal government defines a small business by # of employees or gross sales based on NAICS codes (North American Industrial Classification System) – www.sba.gov/size • Alternative Size Standards • Net worth up to $15M • Two year average net income (after taxes) under $5M • NOTE! Size is based on the combined operations of an applicant and ALL its affiliates

8. Ineligible Businesses For entire list see page 104 thru 126 of SOP 50 10 5 (K) • Non-Profit businesses • Passive Holders of Real Estate (landlords / investment real estate) • Businesses that Restrict Patronage • Speculative businesses • Businesses Engaged in Promoting Religion • Businesses or Associate which had a Prior Loss to the Government (this includes Government Guaranteed Student Loans)

9. SBA Express LOC Maturity SOP 50 10 5 (K) - See Pages 150 thru 152 for details • Extends maximum LOC maturity to 10 years, HOWEVER – • Requires a term-out period that is not less than the draw period (no draws during term-out period); • e.g., loan can have an 8 year maturity with a 2-year draw period and a term-out period of 6 years • Allows increases to SBA Express LOCs during draw period only

10. Becoming an SBA Lender SOP 50 10 5 (K) Pages 8 – 17 and 13 CFR § 120.410 • Lender must be considered in good standing with its state regulator and considered to be Satisfactory by its Federal Financial Institution Regulator (FFIR) as determined by SBA. • Lender’s written request to participate must include a written statement that to the best of its knowledge, the lender has satisfactory: i) financial condition (e.g., capital and liquidity); ii) small business credit administration policies, procedures, and practices that it continues to adhere to in its operations; and iii) small business servicing policies, procedures, and practices that it continues to adhere to in its operations

11. Section 2Eligibility and Underwriting Guidelines

12. SBA Eligibility Requirements • Be an operating business • Organized for profit • Open to the general public • Located in the United States • Small based on regulatory size standards • Demonstrate a need for the desired credit (Credit Elsewhere Test) • Owners must be of “good character” • Demonstrate the ability to repay the loan • DETERMINE ELIGIBILITY FIRST! DON’T WASTE YOUR TIME AND THE BORROWERS TIME.

13. Eligibility Issues • No prior loss to the Government • CAIVRS (Credit Alert Verification Reporting System) MUST BE checked to confirm if any outstanding Delinquent Federal Debt exists. Lender must now inform Applicants that if they default, the names of the small business and guarantors will be referred for listing in the CAIVRS database • Prior Criminal Convictions • Must be disclosed on SBA Form 1919 and SBA Form 912. Misdemeanors, other than a crime against a minor, whose conditions were met more than 6 months prior to application, can be cleared for processing by the Lender. Felonies, misdemeanors with 6 months of application or crimes against a minor, will require fingerprint check and clearance only by SBA Headquarters. • Non-US Citizens • Must be a permanent resident alien OR management must have citizenship or permanent resident status and operated business for at least 1 year AND loan must be 100% collateralized by assets in the United States

14. CAIVRS Lenders are responsible for checking the Credit Alert Verification Reporting System (CAIVRS) to determine if any individual or business has a Delinquent Federal Debt or Prior Loss to the Government which would result in the Small Business Applicant being ineligible for SBA financial assistance. Register for CAIVRS: https://entp.hud.gov/caivrs/public/home.html

15. Franchise Process See SBA Information Notice 5000-17009, Significant Revisions to Franchise Review Process [pp. 89-97 and SBA Notice 5000-17009] • Non-delegated Lenders and CDCs no longer review franchise or other brand documentation for affiliation or [business model] eligibility – SBA makes the determination. • SBA has established SBA Franchise Directory, posted on SBA lender (“For Partners”) Website – if brand not on Directory, NOT eligible.

16. Franchise Process Continued • If the franchise IS listed and eligible, there are three options: • No Addendum Required • SBA Standard Addendum to Franchise Agreement Required (SBA Form 2462) • SBA Negotiated Addendum Required

17. Adding a Franchise to the Directory If Franchisor is not on SBA's Franchise Directory, the Franchisor must submit the following documents to SBA for an affiliation and eligibility determination: • Franchise Agreement (no matter what it is called), • Franchise Disclosure Document (FDD), if applicable, • All other documents the franchisor requires the franchisee to sign. Send to: FRANCHISE@sba.gov

18. Debt Refinancing • SBA does not refinance debt that is on reasonable terms. • Must be able to justify unreasonable terms to be eligible • Demand note or balloon payments and business credit card debt are considered to be on unreasonable terms by the SBA. • SBA-guaranteed loan proceeds may not be used to pay a creditor in a position to sustain a loss. • Lender must demonstrate that the new installment amount is at least 10% less than the existing installment amount. • Same institution debt may be refinanced if on unreasonable terms and has been current for last 36 months.

19. Creditworthiness / Credit Underwriting Lender must analyze each application in a commercially reasonable manner, consistent with prudent lending standards. The cash flow of the Applicant is the primary source of repayment, not the liquidation of collateral. Thus, if the Lender’s financial analysis demonstrates that the 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 or outside sources of cash.

20. Credit Elsewhere Test SOP 50 10 5 (K) - See Pages 102 thru 104 for details Lenders must not make an SBA Express loan which would be inconsistent with SBA’s “credit not available elsewhere” standard (see Subpart B, Chapter 2 of this SOP), i.e., Lenders must not make an SBA-guaranteed loan that would be available on reasonable terms from either the Lender itself or another source without an SBA guaranty. MAKE SURE THIS IS DOCUMENTED IN YOUR UNDERWRITING

21. Use of Proceeds • Purchase machinery, equipment, furniture, fixtures, buildings and land for business use • Purchase inventory • Construction, renovations or improvements of commercial buildings • Refinancing of eligible existing business debt • Permanent or revolving working capital • Finance eligible business acquisition/change of ownership TIP: Make sure to document all sources and uses not just your loan proceeds

22. SBA Express Collateral Requirements SOP 50 10 5 (K) - See Pages 196 for details Lenders must use commercially reasonable and prudent practices to identify collateral items. 1. For loans of $25,000 or less, Lenders are not required to take collateral. 2. For loans over $25,000, the Lender must, to the maximum extent practicable, follow the written collateral policies and procedures that it has established and implemented for its similarly-sized, non-SBA guaranteed commercial loans

23. SBA Express Credit Underwriting SOP 50 10 5 (K) - See Pages 187 thru 188 for details • The credit analysis must demonstrate there is a reasonable assurance of repayment. • b) The credit analysis must substantiate the reason(s) why credit is not available elsewhere on reasonable terms from non-federal sources; • c) The Lender is required to use appropriate, prudent and generally accepted industry credit analysis processes and procedures (which may include credit scoring).

24. SBA Express Credit Underwriting continued • d) SBA Express Lenders may use a business credit scoring model (such a model cannot rely solely on consumer credit scores) to assess character, reputation, and credit history of the applicant and/or repayment ability if they do so for their similarly-sized, non-SBA guaranteed commercial loans. • i. If used, the business credit scoring results must be documented in each loan file and available for SBA review. • iii. Lenders must validate (and document) with appropriate and accepted statistical methodologies their business credit scoring model is predictive of loan performance and they must provide that documentation to SBA upon request.

25. SBA Express Credit Underwriting continued e)The credit decision on SBA Express loans, including how much to factor in a past bankruptcy or whether to require an equity injection, is left to the business judgment of the Lender. Also, if the Lender requires an equity injection and, as part of its standard processes for non-SBA guaranteed loans verifies the equity injection, it must do so for SBA Express loans. While the credit decision is left to the business judgment of the Lender, early loan defaults will be reviewed by SBA pursuant to SOP 50 57

26. Lender’s Credit Memo The Lender’s Credit Memorandum will also be used to demonstrate reasonable assurance of repayment and must include the following: • A description of the business and any affiliates; • A description of the management team. Consider the length of time in business under current management and, if applicable, the depth of management experience in this industry or related industry; • Owner/Guarantor analysis, including obtaining personal financial statements, consistent with lender’s similarly-sized non-SBA guaranteed commercial loans; • Confirmation of Lender’s collection of business tax returns and verification and reconciliation of the applicant’s financial data against income tax data (received in response to IRS Form 4506-T) prior to submitting the application to SBA.

27. Lender’s Credit Memo - Continued • Lender must determine if the equity and the pro-forma debt-to-worth are • acceptable based on its policies and procedures for its similarly-sized, non- • SBA guaranteed commercial loans. • If the lender requires an equity injection as part of its policies and procedures for its similarly-sized non-SBA guaranteed commercial loans it must do so for its SBA loans; • A list of collateral and its estimated value, if secured; and • The effect any affiliates may have on the ultimate repayment ability of the • applicant.

28. Business Valuation Requirements – Change of Ownership: SOP 50 10 5 (K) - See Pages 203 – 205 for details • Determining the value of a business (not including real estate which is separately valued through a real estate appraisal) is the key component to the analysis of any loan application for a change of ownership. An accurate business valuation is required because the change in ownership will result in new debt unrelated to business operations and potentially the creation of intangible assets. A business valuation assists the buyer in making a determination that the seller’s asking price is supported by an independent qualified source.

29. Business Valuation Requirements – Change of Ownership: 1.In order for the individual performing the business valuation to identify the scope of work appropriately, the business valuation must be requested by and prepared for the Lender. The scope of work should identify whether the transaction is an asset purchase or stock purchase and be specific enough for the individual performing the business valuation to know what is included in the sale (including any assumed debt). The business valuation must include the individual’s opinion of value, the qualifications of the individual performing the appraisal and their signature certifying to the information contained in the appraisal. The Lender may not use a business valuation prepared for the Applicant or the seller. The cost of the appraisal may be passed on to the Applicant. a)Non-Special Purpose Properties: i. If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment being financed is $250,000 or less, the Lender may perform its own valuation of the business being sold, unless the Lender’s internal policies and procedures require an independent business valuation from a qualified source.

30. Maximum Interest Rate • Must use an SBA approved Index Wall Street Journal Prime Rate SBA Optional Peg Rate • Loans $50,000 or less Prime plus 6.5% • Loans over $50,000 Prime plus 4.5% • May be Variable or Fixed

31. Guaranty Fee and How to Calculate • Guaranty fees are paid on the guaranteed portion of the loan only. • $125,000 or less – No guaranty fee (2018) • $125,001 - $150,000 = 2% • $150,000 loan – 50% guarantee ($75,000 x 2% fee = $1,500) • $150,001 - $700,000 = 3% • $500,000 loan – 75% guarantee ($375,000 x 3% = $11,250) • Above $700,000 = 3.5% on first $1,000,000 plus 3.75% on guaranty portion over $1,000,000 • $3,000,000 loan – 75% guarantee ($2,250,000 guarantee) • 3.5% on first $1,000,000 = $35,000 • PLUS 3.75% on remaining $1,250,000 = $46,875 • Total SBA fee = $81,875

32. Section 3Due Diligence/SBA Application

33. Environmental Considerations • For all loans regardless of dollar amount lender should make best effort attempt to determine current and known prior uses • See NAICS code list in Appendix 4 of SOP for “environmentally sensitive” NAICS • Loans pp to $150,000 • Environmental Questionnaire may suffice • See • Loans more than $150,000 • Minimum of Environmental Questionnaire and RSRA Report • If RSRA conclusion suggests the property is “elevated” or “high” risk, a Phase 1 must be performed • Besides the Environmental Questionnaire, all reports ordered must state a clear conclusion of risk

34. SBA Environmental Policies and Procedures SOP 50 10 5 (K) - See Pages 205 thru 213 for details • SBA requires an Environmental Investigation of all commercial Property upon which a security interest such as a mortgage, deed of trust, or leasehold deed of trust is offered as security for a loan or debenture. The type and depth of an Environmental Investigation to be performed varies with the risks of Contamination. This SOP provides minimum standards. Prudent lending practices and internal bank policy may dictate additional Environmental Investigations or safeguards. • All Lenders must comply with and meet the requirements of the Environmental Policies and Procedures as set forth in this SOP.

35. IRS TAX TRANSCRIPT/VERIFICATION OF FINANCIAL INFORMATION SOP 50 10 5 (K) - See Pages 217 thru 220 for details • Lender must submit IRS Form 4506-T to the Internal Revenue Service to obtain Federal income tax information on: • i. The Applicant, or the Operating Company if the Applicant is an EPC, for the last 3 years (unless Applicant or Operating Company is a start-up business). • ii.The Lender is required to document in its file confirmation of collection of business tax returns and verification and reconciliation of the Applicant’s financial data against income tax data received in response to IRS Form 4506-T (Request for Transcript of Tax Return) prior to first disbursement; • iii.If the business has been operating for less than 3 years, Lender must obtain the information for all years in operation. • For a change of ownership, Lender must verify financial information provided by the seller of the business in the same manner as above.

36. Contents of Lender’s Application for Guaranty • SBA Form 1919 Borrower’s Application for Guaranty • SBA Form 1920 Lender’s Application for Guaranty • SBA Form 912 Statement of Personal History (if required) • SBA Express Loan Authorization • Lender’s Credit Memorandum • SBA Form 413 Personal Financial Statement (SBA form not required) • SBA Form 159 Fee Disclosure Form • SBA Form 1846 Statement Regarding Lobbying • SBA Form 1624 Certification Regarding Debarment • IRS Form 4506-T Request for Transcript of Tax Return

37. Personal Financial Statement Requirements Personal Financial Statement dated within 90 days of submission to SBA, for all owners of 20% or more (including the assets of the owner’s spouse and any minor children), and proposed guarantors. Lenders may use SBA Form 413 or their own equivalent form.

38. SBA Form 1919 Borrower Information Form

39. SBA Form 1920 Lender’s Application for Loan Guaranty SBA Form 1920 (01/18)

40. SBA Form 159 Fee Disclosure Form

41. SBA Fees for Packaging and Other Services SOP 50 10 5 (K) - See Page 166 for details • Fees for packaging and other services may be based on a percentage of the loan amount or may be charged on an hourly basis. • All fees over $2,500 must be supported, documenting the work performed and the time spent on each activity (see paragraph VIII.B for additional detail). • Fees must be reasonable and customary for the actual services performed. • A standard or flat fee charged to all Applicants is not acceptable.

42. E-Tran / SBA One All SBA loan applications must be submitted via E-Tran or SBA One. SBA One/E-Tran are SBA’s loan guaranty origination and servicing loan systems that are accessed through the SBA’s Capital Access Login System. Request access to SBA’s Capital Access Login System/E-Tran: https://caweb.sba.gov/cls/dsp_login.cfm

43. Section 4Loan DocumentationClosingServicing

44. Authorization SBA Express / Export Express Loan Authorization

45. Express Lender’s Optional SBA Closing Forms • SBA Form 147 Note (See Required Language) • SBA Form 1059 Security Agreement • SBA Form 155 Standby Creditor’s Agreement • SBA Form 148 Unconditional Guarantee (See Required Language) • SBA Form 148L Unconditional Limited Guarantee (See Required Language) • SBA Form 1050 Settlement Sheet • SBA Form 601 Agreement of Compliance

46. SBA Express Note SBA Express Lenders have the option of using their own Note rather than SBA Form 147; however, if the lender uses its own Note, 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 l lender uses its own Note, 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.”

47. SBA Express Guaranty Agreement SBA Express Lenders have the option of using their own Guaranty Agreements rather than SBA Form 148 or 148L; however, if the Lender uses its own Guaranty Agreements, the Lender must ensure that the Guaranty Agreements are legally enforceable and assignable and 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.”

48. Insurance Requirements • Hazard • Required for all assets pledged as collateral • If additional state requirement exists the applicant must also maintain said policy, i.e. wind, hail, earthquake, mine subsidence • Real Estate • Coverage in amount equal to full replacement cost • Max insurable value if full replacement not available • MUST contain MORTGAGEE CLAUSE in insurance certificate • Personal Property • Coverage in amount equal to full replacement cost • Max insurable value if replacement not available • Must contain at least Lender’s Loss Payable Clause • Lender’s Loss Payee strongly suggested • IF LENDER DOES NOT REQUIRE HAZARD INSURANCE FOR SIMILARLY SIZED CONVENTIONAL LOANS IT MAY DO SO, BUT BE SURE TO DOCUMENT LOAN FILE

49. Remitting Payments to the SBA All SBA loan payments, guaranty fees, audit fees, etc. must be paid through Pay.gov. https://www.pay.gov/paygov/

50. Servicing and Liquidation • SBA 7(a) Servicing and Liquidation SOP 50 57 2 became effective on December 1, 2015 • SBA Servicing and Liquidation Matrix for Unilateral Authority V14 • Servicing and Liquidation training is available through the SBA District offices