VISION

INCREASING OPPORTUNITIES FOR ALL

SMALL BUSINESSES TO SUCCEED

SBA FINANCIAL ASSISTANCESBA FINANCIAL ASSISTANCE

An SBA guaranty is designed to help small businesses get access to reasonable credit from commercial lenders.

SBASBA’’s Guarantys Guaranty

For 7(a) lenders, the SBA guaranty reduces the lender’s risk in cases of loan default when the lender requests SBA to honor its guaranty. The guaranty ranges from 50 percent (SBAExpress) to 85 percent (regular 7(a) loans of $150,000 or less). (Only one program has an SBA guaranty of 90 percent – Export Working Capital Program.)

SBA GuarantySBA Guaranty

For 504 loans, SBA guaranties the debenture (100 percent) that funds the loan. This permits the debenture to be pooled with other debentures and sold to Wall Street on a monthly basis at advantageous fixed rates. These rates are then passed on to the small business borrower as the basis for the 504 loan rate.

FY 2005 FY 2005 ––

A Record Year A Record Year

7(a) Loans: 95,900 loans totaling $15.2 B

31 percent to new businesses*32 percent to minority-owned businesses25 percent to women-owned businesses6.3 percent to franchises (10.8% of

dollars)*number of loans

Record Year continuedRecord Year continued

504 Loans: 9,194 loans totaling $5.0B

14 percent to new businesses30 percent to minority-owned businesses15 percent to women-owned businesses9.7% to franchises (15.5% of dollars)

The number of loans (7(a) and 504) approved in FY 2005 is more than double the number approved during FY 2000.

7(a) Loans (standard, PLP, SBA7(a) Loans (standard, PLP, SBAExpress, Express, Community Community ExpressExpress), 7(a) GO Loans, 504 Loans), 7(a) GO Loans, 504 Loans

Insert Word Document describing the loan programs.

SBA DELIVERY PROGRAMS

REGULAR 7(a) – (15%) processed in the district offices

Programs where loans are processed centrally are:

PREFERRED LENDERS PROGRAM (PLP) – (19%)

SBAEXPRESS and Community Express – (66%)

_______________________

All 504 LOANS: Centralized processing permits quick turnaround times from SBA.

CREDIT POLICYWhen does a lender seek an SBA guaranty?

The lender has already analyzed the request and determined that there is a reasonable expectation that the borrower will pay the loan back in a timely manner from the business operations BUT

CREDIT POLICY (cont.)

• Borrower requires a longer loan term than the lender normally provides; or

• Collateral in a liquidation would not cover the loan amount; or

• Borrower is a new business with an unproven track record; or

• Borrower’s credit score is lower than lender normally accepts, but it is still satisfactory.

SBA LENDING

•CASH FLOW LENDER•NOT ASSET BASED

(exception Caplines) •COLLATERAL IS SECONDARY However, SBA’s guaranty is not a substitution for pledging of collateral by the business and its owners. For 7(a) the collateral available (including personally owned assets) is usually taken. For 504, the project assets are usually sufficient collateral.

SBA’s Role in Meeting Small Business Loan Demand

Lender Range SBA Range “No” RangeLenders are comfortable making loans without SBA’s guaranty

Loan credit or terms are outside of the lenders’ normal range. Loan will not be made without SBA’s guaranty

Lenders are not comfortable making loans even with SBA’s guaranty

Factors that determine this range:

• Overall economy• Lenders’ regulatory environment• Lenders’ liquidity (or lack

thereof)• Lenders’ competitive

environment

• No management experience• No potential chance of

repayment in a timely manner

• Unfeasible business idea• No financial reserves

• Experienced management• Sterling credit• Generous collateral• Sound business idea• Financial reserve

Most Viable Business Profile Least Viable Business Profile

SBA 7(a) Eligibility Parameters

BASIC PURPOSE / USE OF PROCEEDS• Working Capital, Machinery &

Equipment, Real Estate, Inventory, and Furniture & Fixtures

MATURITY - UP TO 25 YEARS – Based on use of proceeds

SIZE• # Employees or $ Receipts

ELIGIBILITY -

SIZE STANDARDS

General Range for 7a Loans•Manufacturer - 500 employees

•Wholesalers - 100 employees

•Retail - $6 Million

•Service - $6 Million

•Contractors - $11.5 - $27.5 Million

Basic 504 Eligibility CriteriaBasic 504 Eligibility Criteria

•Basic Purpose of the Program: Job creation

•Use of Proceeds: For long-term fixed assets. Generally owner-occupied building (and land).

•Working capital or refinancing cannot be included in use of proceeds.

•Term: 10 or 20 years.

Size Standards for 504 LoansSize Standards for 504 Loans

Business (including any affiliates) must not exceed

•an average net income after taxes of $2.5 million AND

•tangible net worth of $7 million.

INELIGIBLE -

BUSINESS TYPES Businesses deriving income from gambling (other than small amounts such as selling lottery tickets in a convenience store).

Real estate held for sale or investment (shopping center for example)

Businesses that establish monopolies or pyramid sales

Businesses that limit the number of memberships for reasons other than capacity.

Businesses located in foreign countries

Businesses deriving income from the sale of products, services or presentation of depictions or displays of a prurient sexual nature.

Not-for-profit businesses.

Ineligible Businesses cont.

Businesses in which an associate is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude.

(Associate = owner, officer, director, or key employee)

Note: If an associate is not incarcerated, on probation, or on parole but does have an arrest record, such as a DUI, the individual must go through a clearance process involving at a minimum a name check through FBI records. Post 9-11 has caused this process to take months. In some cases, the lender is given the authority to process and close a loan prior to receiving the results. There is a risk to the lender associated with that authority.

Ineligible Businesses cont.Ineligible Businesses cont.

Businesses that have failed to file their federal income tax returns for any of the previous 3 years.

Lenders are required to check with the IRS.

Specific Issues regarding FranchisesSpecific Issues regarding Franchises

There can be no evidence of control (affiliation) between the franchisor and franchisee:

Examples of provisions in franchise agreements that caused a determination of affiliation are the following:

•A franchise fee equal to 52 percent of gross profits;

•A provision that allowed the franchisor to terminate the franchise whenever the franchisor opened a new retail store in the franchisee’s primary zip code;

• A provision that a franchisee could not transfer its interest in the franchise without the prior written consent of the franchisor, which could be withheld for any reason by the franchisor at its sole discretion;

• A provision that the franchisor has the option to purchase the franchisee’s assets upon expiration or breach of the franchise, where the franchisor has the ability to control the price at the time of purchase by the franchisor unilaterally determining “fair market value”; and by the franchisor unilaterally selecting an appraiser for the assets.

www.franchisregistry.comwww.franchisregistry.com

A listing of franchises that SBA has determined have acceptable franchise agreements may be found at this site.

The Registry lists names of franchise companies whose franchisees enjoy the benefits of a streamlined review process for SBA loan applications. Loan applications for registered franchisors can be reviewed and processed quickly and efficiently.

Participation in the Registry is voluntary.

Franchises cont.Franchises cont.

If a franchisor does not participate in this streamlined review process, loan applications by its franchisees must be reviewed individually by SBA or its lenders which can result in a delayed loan decision.

Maximum Loan SizeMaximum Loan Size

Maximum 7(a) loan is $2M (gross amount) with an SBA guaranty of 75% ($1.5 M) A small business including any affiliates

can receive no more than

$1.5 M in 7(a) guaranty financing.

Maximum 504 debenture is $1.5M (job creation); $2M (public policy goal) and $4M (manufacturers). First mortgage financing has to be at least as much as the debenture.

Guaranty Fee To SBA (Zero Subsidy Programs)

7(a) Guaranty Fee (on guaranteed portion) This fee is paid by the borrower.

• Term of Loan ≤12 months

0.25%

• Term of Loan >12 months

Loans:

<

$ 150,000

2%

Loans > $ 150,000 <

$700,000

3%

Loans > $700,000

3.5%*

(*Guaranteed amounts above $1 million 3.75%)

7(a) On-Going Fee: 0545% annually (paid by lender) on principal balance.

SBA Guaranty Fees cont.SBA Guaranty Fees cont.

504 Loan ProgramUpfront Fee from Borrower: 0.5 %Upfront Fee from 1st mortgage lender:

0.5%

On-going Fee from CDC: 0.192.

Fees to 7(a) LenderFees to 7(a) Lender

The regulations governing fees may be found at 13 CFR §120.221 and §120.222.

Regular 7(a) Loans: Lender cannot require a packaging fee but may receive a fee if borrower OKs it.

Any packaging fee a borrower pays, either to a lender or to an independent packager, must be identified to SBA by means of Form 159.

Fees to a CDCFees to a CDC

Unlike a 7(a) lender, a CDC does not receive interest income on the borrower’s loan. The investor does. Therefore, the CDC is compensated by the borrower through fees. The upfront fee permitted to be charged is 1.5%. The CDC also gets an on-going annual fee from the borrower. This annual fee has a range: 0.625 to 2.0% of the principal balance adjusted every 5 years. Most CDCs charge between 0.625 and 1.0%.

Prepayment Penalties Prepayment Penalties ––

7(a) Loans7(a) Loans (payable to SBA)(payable to SBA)

If the loan has a maturity of 15 years or more, during the 1st 3 years, there is a prepayment penalty on any voluntary prepayments above 25 percent of the outstanding balance during that year. The penalty is:

1st year: 5 percent 2nd year: 3 percent3rd year: 1 percent of the prepaid amount.

Prepayment Penalties Prepayment Penalties ––

504 Loans504 Loans (payable to the investor)(payable to the investor)

20- year debentures: Declining percentage during the 1st 10 years from 100 percent of the interest the first year to 0 percent the 11th year.10-year debentures: Declining percentage during the 1st 5 years.

504 debentures do not permit partial prepayments.

Top 10 7(a) Lenders for 2005Top 10 7(a) Lenders for 2005

Approximately 5000 lenders are SBA 7(a) participating lenders.

These include credit unions and non-bank lenders.

Top 10 7(a) Lenders Top 10 7(a) Lenders ––

20052005

BANK OF AMERICA 11,593 $411,929,900

CITIZENS BANK GROUP 5,428 $216,212,800

CAPITAL ONE BANK 4,891 $213,408,300

INNOVATIVE BANK 3,325 $28,559,500

WELLS FARGO & COMPANY 3,205 $434,086,897

J.P. MORGAN CHASE BANK 2,176 $249,582,419

U.S. BANK 1,968 $384,073,000

CIT SMALL BUS. LENDING CORP 1,508 $751,680,594

NATIONAL CITY BANK 1,500 $105,096,070

ZIONS BANK GROUP 1,467 $191,272,100

CDCsCDCs

There are approximately 270 CDCs.

Each CDC has a specific geographic territory, usually the state in which it is located plus some contiguous counties in an adjacent state.

Top 10 CDCs Top 10 CDCs ––

FY 2005FY 2005

CDC Small Bus Fin Corp 670 $ 461,912,604

Florida Bus Dev Corp 376 $ 170,560,000

EDF Resource Capital Inc 330 $ 222,649,000

Florida First Capital Fin Corp Inc 280 $ 134,058,000

TMC Dev Corp 233 $ 160,467,000

Mountain West Small Bus Fin 200 $ 90,423,000

Granite State EDC 199 $ 81,945,000

Empire State CDC 181 $ 100,231,000

Front Range Reg EDC 180 $ 76,463,000

Small Bus Growth Corp 168 $ 93,410,000

What What www.sba.govwww.sba.gov

looks likelooks like

www.sba.govwww.sba.gov

On this page you will find a map of the U.S. If you highlight one of the states, this will take you to the home page of SBA’s district office in that state.

SBASBA’’s Websites Website

www.sba.gov

SBA GeorgiaSBA Georgia’’s Web Pages Web Page

www.sba.govwww.sba.gov

These district office web pages have links to useful financing information.

For example, on the Georgia web- page there is a link to the top 7(a) lenders and CDCs in the state.

List of Top Lenders in GeorgiaList of Top Lenders in Georgia

Top CDCs in GeorgiaTop CDCs in Georgia

Franchise Registry InformationFranchise Registry Information

I have also included a handout regarding the Franchise Registry for those Franchisors in the audience who may be interested in registering.

Thank you for your time.