Washington State Small Business Credit Initiative

Helping lenders help small businesses

SSBCI

The Small Business Jobs Act of 2010 directed $1.5B in federal funding for supporting state programs designed to increase access to capital and assist Washington’s small businesses to grow and create new jobs.

Washington State will receive $19.7M, which will be distributed through 3 programs.

$20 million in projected venture capital funding available

W-Fund Investments to include early or “seed” stage life science, biotech, medical device, alternative energy, and IT companies and new developments

Apply at www.TheWfund.com

W-FundVenture Capital Funding

$70 million in projected funding available

Craft3 Funds will concentrate in providing assistance to small businesses in underserved communities

Will provide financing through Washington state’s CDFI network

Focuses on assisting Special Asset credits and loans requiring creative structuring.

Craft3 Fund

Up to $6 million in funding available

The Capital Access Program encourages new lending by allowing credit unions to offer loans to businesses that might otherwise fall slightly short of conventional credit underwriting by providing additional loan insurances

CAP provides borrowers the flexibility to design the program around their existing internal processes

Capital Access Program (CAP)

What is CAP?• Contributions into a reserve account

• Allows participating lenders to approve loans and retain or attract small business customers.

• Aim to maintain valued customer relationships with participating bank.

• Support financing for small businesses fallen to marginal by contributing to lenders’ loan loss reserves.

• Borrower’s credit is solid, but not enough to secure traditional bank loans.

• Broad eligibility. Most businesses qualify including non-profits.

at your credit union

How CAP Works…• Loan enrollment is fast and easy.• Commerce’s role simply to ensure that the borrower and

loan purpose meet eligibility criteria.• Lender and borrower pay premiums into a designated

reserve account at the participating bank.• Commerce matches lender and borrower premiums on a

loan-by-loan basis.• The lender can make claims against funds to cover losses on

enrolled loans/LOCs.• Losses can be recovered on loans that are written off and

many occur prior to collateral collection.

Growing the Reserve Account

Scenario: • Lender enrolls 10 loans totaling $500,000

• $60,000 goes in the loss reserve account (using an average premium of 3% each from the lender and borrower, 6% from CAP for a total of 12%)

• An enrolled loan defaults with a $50,000 outstanding balance (P&I)

• Lender is reimbursed 100% of the claimed loss, $10,000 remaining balance.

Borrower: 1-3.5%

WCAP: 2-7%

Lender: 1-3.5%

What Type of Loans Qualify?

“Business Purpose,” term loans and lines of credit including:• Start up costs• Purchase of equipment/inventory• Other projects including working capital• Acquisition, construction, or renovation of a place of

business• Franchise fees

INELIGIBLE LOAN PURPOSES • Financing a non-business purpose

• Passive real estate investment

• Refinance the financial institution or an affiliates existing debt without a new credit determination (delinquency cannot be refinanced).

• Fund any unguaranteed portion of an SBA loan

• Purchase any portion of ownership interest from existing owner (cash out)

• Reimburse funds owed to any owner, including any equity injection or injection of capital for the business’ continuance

• Repay delinquent federal or state income taxes unless the borrower has a payment plan in place with the relevant tax authority

• Repay taxes held in trust or escrow

How Does the Process Work?

• 1-page One time Bank Participation Application• Standard Bank Participation Agreement• 2-page Loan Enrollment Form with Certification• 1-page Loan Modification Form• 1-page Loan Claim Form• Reporting is quarterly / annually

Flexibility for Banks

• Lender determines source of their premium funds (e.g. the borrower)

• Flexibility on the premium rates to invest (2-7%*)• Lender chooses to enroll all or a portion of a loan, including

increases• May refinance enrolled loans without having to obtain

Commerce approval• Enrolled loans may be modified by extending terms /

amending covenants / releasing collateral without needing Commerce approval

Program Perks

Allows Credit Unions to build their small business loan portfolio

Loan enrollment approvals are fast Loan terms are determined by the Credit Union Commerce takes no position on the collateral The Reserve Account is pooled within each institution Reporting requirements are minimal Program support includes Commerce staff, a program

specific website and a graphic based lender manual

Scenario #1 : Modification

The borrower wants to increase their existing enrolled loan by $20k to do site improvements. How does this affect loan enrollment?

It is at the credit union’s discretion whether they chose to enroll the increase or not. If they choose to enroll the increase, then the reserve contributions from all three parties are pro-rata and would only apply to the increased amount as the former amount was already enrolled.

Scenario #2 : Existing Loan

Your institution has an existing loan on the books which you wish to enroll. Can you?

Financial institution lenders are generally prohibited from refinancing an existing outstanding balance or previously made loan from an existing borrower. However, you may use CAP to support a new extension of credit that repays the amount due on a matured loan or line of credit when all the following conditions are met:

the new loan or line of credit includes the advancement of new monies to a small business borrower (excluding closing costs)

the new credit supported with a new credit determination proceeds from the new credit may only be used to satisfy the outstanding balance

of a loan or line of credit that has already matured or otherwise termed and the prior debt was used for an eligible business purpose

the new credit has not been extended for the sole purpose of refinancing existing debt owed to that same financial institution lender.

Scenario #3 : RLOC

You have enrolled a revolving line of credit that has now matured. Do you need to re-enroll it and pay new premiums?

Each credit union has the flexibility to determine whether they want the initial premium and subsequent renewals of a LOC to stay enrolled OR they may choose to require the borrower to re-enroll at each renewal (requires a new enrollment form and premiums).

Scenario #4 : Claim

An enrolled $100,000 loan has been paid down to $70,000, but the credit union is forced to charge off the remainder. Can the full $70,000 be reimbursed from the CAP loss reserve account?

The lender could issue a claim to CAP upon write-off for the

amount of the write-off including 90 days worth of interest owed as well as some collection costs up to the total balance currently in the reserve account. If the Reserve funds were insufficient, the additional $ could be collected by the credit union up to 24 months after the original claim was made from funds in the reserve up to 75% of the reserve balance at the time the follow-up claim was made.

Scenario #5 : Reimbursement

Your potential borrower asks for a loan to buy a commercial property for their business but the LTV is high, what can be done?

The Lender can choose to enroll only a portion of the loan to

cover just the high LTV amount. This allows the credit union to approve the loan and mitigates the risk of a higher than normal LTV.

Scenario #6 : SBA bridge

Your borrower is seeking an SBA 504 loan and you are uncomfortable carrying the debt for the 60 days it takes the SBA to confirm their approval. How can CAP help?

The Credit Union can choose to enroll the bridge loan into

CAP to secure additional risk mitigation. Since bridge loans are short term this would allow the credit union to quickly build up their CAP reserve account.

Before accepting CAP funds, a Washington state chartered credit union or federal chartered credit union must be an approved public depositary.

Application to be a public depositary must be approved by the State Treasurer’s Office.

The maximum CAP deposit is $250,000 per government custodian, i.e. Dept of Commerce.

RCW 39.58.240

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Application letter to Office of the State Treasurer

Nancy Adams, Administrator, Office of the State TreasurerLinda Jekel, Director of Credit Unions, Dept. of Financial Institutions

Date of Application J ames L. McIntire, Chairman Public Deposit Protection Commission PO Box 40206 Olympia, WA 98504-0206 Dear Mr. McIntire: (Credit Union Name), headquartered in (City), Washington, requests authority to accept Washington public deposits in accordance with Revised Code of Washington (RCW) 39.58.240. Along with this letter, we are submitting the following items to the Public Deposit Protection Commission (Commission) for their consideration in approving (Credit Union Name) as a public depositary for Washington State. Certificate of Insurance issued by the NCUA Certificate of Authority issued by the Department of Financial Institutions

The Credit Union agrees to comply with: 1. Deposit limitations set forth in RCW 39.58.240, and

2. Monthly reporting requirements, in a format supplied by the Commission,

indicating the amount of public funds on deposit for each depositor as of the last day of each calendar month. Report due within eight business days following month end.

Sincerely, President, CEO, or Designated Signee

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Additional Information Office of the State Treasurer

Public Deposit Protection Commission website:◦ http://www.tre.wa.gov/investors/pdpc.shtml

Authorization letter and web access forms are available from Nancy Adams at:◦ nancy.adams@tre.wa.gov

Questions?

How to learn moreGo to the website at

ChooseWashington.com

Call the Program Manager Jane Swanson

(360) 725-4062