SBA 504 Financing Program & Colorado Lending Source
How does CLS fit in?
Fixed asset financing options ...
• Pay Cash • Seller Financing • Conventional Financing • SBA 7(a) Loan Program • SBA 504 Loan Program • NMTC or CRF Program
Typical SBA 504 Structure
Eligible Uses of 504 Proceeds
Purchase / renovate / expand existing .. Purchase land / construct new … Purchase machinery and equipment Professional fees Repay interim financing costs “A limited amount" of debt refinancing
Special Purpose or Start Up
Minimum Maximum
Minimum
What is a start up?
A “start-up” business is generally identified as a business less than two years old. In addition, according to the new SBA Q&A banker guide:
Q: In the 504 program, is a "change of ownership" considered a "new business?”
A: Yes, SBA considers a change of ownership to be a "new" business because it will result in new, unproven ownership/management and increased debt unrelated to business operations.
Special Purpose and Start-Up
Minimum Maximum
Minimum
Possible 504 Structure
How Does It Work?
The “law of large numbers”
SBA 504 Interest Rates
INTEREST RATE COMPONENTS
SBA 504 Interest Rates ...
10 year Treasury + Spread over the Treasury
then
+ Servicing fee (= 0.100%) + SBA fee (= 0.000%) + CDC fee (= 0.625% or 1.000%)
Web Site Chart
Web Site Chart
CLS – 504 Loan Program Fees
CLS – 504 V’s 7(a)
Basic Eligibility Criteria
for profit organization ... based in the United States ... economic development objectives ... owner occupancy requirements ... business net worth & profitability benchmarks personal liquidity test on owner/owners ...
Owner Occupancy Criteria
• Existing Building
Must occupy 51%
• New Building
Must occupy 60% initially Must occupy additional space within 3 years Must plan to occupy at least 80% in 10 years
Business Benchmarks
@ 08/18/08
TANGIBLE net worth must be less than
$8.5 million AND
Net profit (2 yr. average) must be less than $3.0 million OR Use SBA size standard definitions
Benefits of the SBA 504 ...
(1) To the small business borrower
FIXED, long-term interest rates
Ninety percent (90%) financing (which
allows the business to conserve valuable working capital)
“Soft Costs” can be financed
SBA 504 loan is an assumable loan
Benefits of the SBA 504 ...
(2) To the partner bank lender
Strong
loan-to-value
Business
conserves valuable working capital available for growth transaction between the small business and bank lender
Relationship
Benefits of the SBA 504 ...
(3) To the Colorado economy
Wealth
creation impacts of tax base
Broadening
Multiplier
effects associated with an infusion of funds from outside the state
Maximum & Minimum Loans
An
eligible entity may borrow up to 40% of the “Total Project Cost” amount OR $1,500,000, whichever is less. a Public Policy goal is met, an eligible entity may borrow up to 40% of the “Total Project Cost” amount OR $2,000,000, or $4,000,000 whichever is less. minimum loan is usually $25,000.
If
The
Costs of the SBA 504 ...
Transaction costs associated with funding ( = 0.65% of SBA 504 share), financed as part of the SBA 504 loan. 504 closing costs ($1,500), paid to an attorney preparing all the funding documents. Fees included in the monthly loan payment / effective interest rate.
More Costs ...
• A "bank participation fee" equivalent to 0.0% of whatever the new first security interest position ends up being ...
Yet More Costs ...
Personal guarantee of anyone who owns 20% or more of any “involved” small business. penalty on SBA 504 portion for half of the life of the loan.
Prepayment
Recent (02/17/09) Changes ....
• Reduced fees through 12/31/09... • Limited amount of refinancing possible... • Modified policy on environmental reports ...
“franchises” ....
... Franchise Agreements, License Agreements, and Dealer Agreements (with the exception of Dealer Agreements from new car manufacturers). A finding of eligibility means that the agreement does not impose unacceptable control provisions on the Small Business Applicant which would result in affiliation. The fact that the agreement is eligible does not mean that the Small Business Applicant is eligible. Affiliation can exist through:
• common ownership;
• common management;
• excessive restrictions upon the sale of the franchise interest; or
• control by a franchisor/licensor/dealer either directly or through an affiliated entity or
agent such that the Franchisee/Licensee/Dealer does not have the independent right to both profit from its efforts and bear the risk of loss commensurate with ownership.
Appraisals ....
Appraisals must now name the CDC & SBA.
“U.S. Small Business Administration and Front Range Regional Economic Development Corp. d.b.a Colorado Lending Source, Ltd.”
•
Environmental reports ....
The Steps of an Environmental Investigation
NAICS Codes. CDC must begin by determining the NAICS code(s) for the Property’s current and known prior uses and comparing the NAICS code(s) to the list of environmentally sensitive industries in Appendix 4.
(1) If there is a NAICS code match to an environmentally sensitive industry identified in Appendix 4, the Environmental Investigation must begin with a Phase I, regardless of the amount of the loan. If the NAICS code begins with 447 (gas stations with or without convenience stores), CDC must comply with “Requirements Pertaining to Gas Station Loans” in Appendix 5.
(2) If there is not a NAICS code match to an environmentally sensitive industry, the CDC must begin with an Environmental Questionnaire and Records Search with Risk Assessment.
•
•
Gas Stations ....
1. Relevant document review ...
2. Environmental investigation ...
(= phase one or two + equipment testing)
3. SBA Indemnification agreement ...
CLS - our Role
Mission statement ... Market the 504 loan program
Package 504 loans Coordinate funding 504 loans Service 504 loans Other economic development
objectives
www.ColoradoLendingSource.org
CLS - the Organization
Members Board of Directors Executive Director Staff
Small Business Owners Government agencies Banks / private sector lenders Community organizations
CLS - a Snapshot
• Created and certified in 1990 • One of 260+ CDC’s nationwide • One of only 5 CDC’s in Colorado • ALP status (only 2 in Colorado) • PCLP status in 1998 (only 18 in USA) • Nationally ranked CDC (top 10) • One of only a handful of CRF & NMTC lenders
CLS - 504 loans Nationally
CLS - 504 loans Colorado
CLS processes between 6 and 7 out of every 10 SBA 504 loans approved in the state of Colorado!
CLS - 504 Loan Portfolio
CLS - Service Territory
• ALL COLORADO • (but only since November 6, 2003)
....
Thank you for participating in our “webinar”!
Questions / comments / suggestions / criticisms / recession tips / solutions …. Mike O’Donnell mike@coloradolendingsource.org