SBA Loans and Other "Special Programs"

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 1

SBA Loans & Other Special ProblemsBusiness Borrowing Basics

premier date: april 6, 2016

Premier Date: April 6, 2016

Business Borrowing Basics

SBA Loans & Other Special Problems


WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS



meet the facultyPANELISTS

Tom Huffman Wintrust BankKaren Lennon Wessex 504 CorporationWilliam McClain Windsor AdvantageGreg Rotter Rotter & Associates, Ltd.

MODERATOR Chris Cahill Lowis & Gellen LLP


Practical and entertaining education for business owners and executives, accredited

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NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

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about this webinarA new or expanding business may want to consider looking to the United States Small Business Administration (“SBA”) for help with financing. The SBA participates in a number of loan programs designed for business owners who may have trouble qualifying for a traditional bank loan. Such programs are not direct loans by the government. Rather, they involve a government guaranty, which typically covers between 75 and 90 percent of the loan, thus eliminating much of the risk for the actual lender and enabling the lender to offer more favorable terms to borrowers. The possible downsides are that additional paperwork need to be filed, extra fees may need to be paid, and it may take longer to get a loan decision. This webinar focuses on two such programs (504 and 7a), and touches on some other alternatives borrowers have to leverage the government’s support of small businesses.

about this seriesCash is the lifeblood of any business. While some companies operate solely with their own working capital, most must borrow money from time to time. Borrowing, of course, includes something as mundane as buying goods or services on credit (whether on credit terms or by using a credit card). But most companies of any significant size have a revolving line of credit or a term loan, or both, with a bank or other company that is in the business of lending. This webinar series explores where companies should look for business loans, how to negotiate them, and what to do if they default under them.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs. 7© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

episodes in this series

EPISODE #1 Negotiating a Loan Agreement 2/3/2016

EPISODE #2 Alternative Financing – When the Bank Says “no” 3/2/2016

EPISODE #3 SBA Loans and Other “Special Programs” 4/6 2016

EPISODE #4 Dealing with Defaults – When Your Company Runs Into Trouble 5/4/2016

Dates above are premier dates All webinars also available On Demand through West LegalEd Center and Vimeo



SBA LOANSSBA Basics Industries Using SBA loansQualifications to get an SBA loanPermitted Uses of FundsPreparing to Get a LoanDebunking the myths of SBA loansGuaranty IssuesBack End Issues


SBA 7a BASICS

Primary Loan ProgramProvides short- and long-term loans to eligible, creditworthy, start-up

and existing businesses that cannot obtain financing on reasonable terms through normal lending channels

SBA provides financial assistance through its participating Lenders in the form of loan guaranties, not direct loans


SBA 504 BASICS SBA issues authorization for loans to be made by Certified Development Company (“CDC”); Bank

issues commitment for loan to be made by Bank

Job creation/retention

Bank lends 50% of project cost and takes a 1st mortgage/lien 7 or 10 year terms

CDC lends 40% of project cost and takes a 2nd mortgage/lien 10 or 20 year terms

Borrower puts in 10% of project cost (the equity)

Bank and CDC work together

CDC loan is guaranteed by SBA

Example: $2,000,000 project cost

Bank Only:$1,500,000 Bank Loan$ 500,000 EquitySBA 504 Project:$1,000,000 Bank$ 800,000 SBA 504$ 200,000 Equity


7a MOST COMMON BORROWERSFranchisees

1) Food Industry2) Gas Stations3) Hotels (high amount of funds, smaller number of loans)

Medical Professionals and Other Service EnterprisesManufacturersRetailMergers & Acquisitions; Partner Buyout Activity


504 MOST COMMON BORROWERS Owner Occupied (>50%) REAL ESTATE

1) Refinances2) Purchases

MANUFACTURERS COMPANIES THAT USE HEAVY EQUIPMENT WHAT COMPANIES ARE A GOOD FIT?

Existing Businesses Owner-occupiers Have a long-term outlook Understand rate risk Frequently are replacing rent Often are buying their first property Often place a premium on maintaining working capital


WHAT QUALIFIES? What type of company is eligible?

For profit Operate primarily in U.S. Any organization type – sole proprietor, partnership, LLC, corporation Small Business

What determines “small business” Less than $15 million of tangible net worth (balance sheet test: assets minus liabilities must

be $15 million or less,OR $5 million or less in after-tax profit, on average, over the last 2 years; 98% of what people commonly refer to as “small” businesses qualify.


MAJOR DIFFERENCES BETWEEN 7a AND 504 LOANS

504 Loans 7a LoansAmounts Max SBA portion is $5.5MM; Bank

piece can be any size.Maximum Loan size is $5MM

Use of Proceeds Real Estate-related costs (can include construction and soft costs), Equipment and refinancing.

Real Estate, Equipment, Inventory, Working Capital, Intangibles.

Terms 10 years – Equipment OnlyUp to 20 years – Real Estate and Equipment

Up to 25 years for Real Estate; 10 years for Equipment and/or Business Goodwill; 7 years for Inventory; blended term for mixed use.

Loan Structure Lender (Bank) finances 50%CDC/SBA finances up to 40%10% minimum equity (15% for start ups and special purpose)

Lender and SBA only – 1 Loan.10% minimum equity when purchasing Real EstateBank determines credit standards

Interest Rate Lender (Bank) offers market rateCDC/SBA portion is fixed for 20 yrs, determined by current Bond Market yields

Bank sets rate, maximum of 2.75% over Prime. Can be adjustable or fixed. Max of 2.25% over Prime on loan terms < 7 yrs.

Job Impact One job created or retained per $65,000 of debenture. Some Exceptions.

No requirement


INELIGIBLE BUSINESSES.

Those engaged in illegal activities, loan packaging, speculation, multi-sales distribution, gambling, investment or lending, or whose owner is on parole; specific types of ineligible businesses includes:

• Real estate investment firms, when the real property will be held for investment purposes as opposed to loans to otherwise eligible small business concerns for the purpose of occupying the real estate being acquired

• Firms involved in speculative activities that develop profits from fluctuations in price rather than through the normal course of trade, such as wildcatting for oil and dealing in commodities futures, when not part of the regular activities of the business

• Dealers of rare coins and stamps

• Firms involved in lending activities, such as banks, finance companies, factors, leasing companies, insurance companies (not agents), and any other firm whose stock in trade is money


INELIGIBLE BUSINESSES cont..

• Pyramid sales plans, where a participant's primary incentive is based on the sales made by an ever-increasing number of participants; such products as cosmetics, household goods, and other soft goods lend themselves to this type of business

• Firms involved in activities illegal in the jurisdiction where the business is located. Included in these activities are the production, servicing, or distribution of otherwise legal products that are to be used in connection with an illegal activity, such as selling drug paraphernalia or operating a motel that permits illegal prostitution

• Gambling activities, including any business whose principal activity is gambling. While this precludes loans to racetracks, casinos, and similar enterprises, the rule does not restrict loans to otherwise eligible businesses, which obtain less than one-third of their annual gross income from either the sale of official state lottery tickets under a state license, or legal gambling activities licensed and supervised by a state authority

• Charitable, religious, or other non-profit or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives are not eligible.


PERMITTED USES OF FUNDS Basic uses for 7(a) loan proceeds include:

Long-term working capital pay operational expenses, accounts payable,and/or to purchase inventory

Short-term working capital needs, including seasonal financing, contract performance, construction financing, and exporting

Revolving funds based on the value of existing inventory and receivables, under special conditions

To purchase equipment, machinery, furniture, fixtures, supplies, or materials

To purchase real estate, including land and buildings

To construct a new building or renovate a building

To establish a new business or assist in the acquisition, operation, or expansion of a business

To refinance business debt, under certain conditions


PERMITTED USES OF FUNDS cont.504 Loans are limited to Real Estate-related costs (can include construction and soft costs), Equipment, and refinancing.

SBA loans cannot be used for the following purposes:

To refinance debt where the lender is in a position to sustain a loss and SBA would take over that loss through refinancing

To effect a partial change of business ownership or a change that will not benefit the business

To permit the reimbursement of funds owed to any owner, including for any equity injection or injection of capital to continue the business until the SBA-backed loan is disbursed

To repay delinquent state or federal withholding taxes or other funds that should be held in trust or escrow

For a purpose that is not considered to be a sound business purpose as determined by SBA

[If you are unsure whether or not your anticipated use of funds is allowed, check with your SBA-approved lender]


PREPARING TO GET THE LOAN Determining Borrowing Need (be conservative: better to ask for more; once approved, it is

difficult to go back and ask for more)

Lining up Professionals (attorneys, accountants, appraisers, surveyors, etc.)

Preparing Financial Documents (balance sheet, cash flow statement, projections, a/r agings, inventory list, tax returns, personal financial statements of guarantors)

Preparing Management Information (bio’s of senior management, story of company, explanation of any negative public information)

Preparing Corporate Organizational Docs (operating agreement, by-laws, partnership agreement, articles of organization/formation/incorporation)

Shopping the Loan (capital advisor, broker, SBA loan packager)


DEBUNKING THE SBA MYTHS SBA LOANS TAKE FOREVER TO CLOSE AND FUND

From loan intake to SBA loan authorization is typically 4-8 weeks Underwritten by Bank SBA is not involved with the closing; once authorization is issued by SBA, SBA’s involvement

is invisible to Borrower

LOANS DOCUMENTATION IS MASSIVE While there may be a few extra documents in an SBA loan, they are usually very short and do

not make the loan documentation process more cumbersome. Loan documents are not outrageous, SBA has suggested forms on-line and some lenders use

them all, so no surprises. When documented by outside counsel, loan documents are usually very reasonable

FEES AND COSTS ARE MUCH HIGHER There are a few extra fees, but rates are market


DEBUNKING THE SBA MYTHS cont.

MANY COVENANTS ARE REQUIREDSBA does not permit acceleration based upon covenant breaches in

these types of loans!SBA IS WATCHING YOU

Quit being paranoid!SBA is actively involved only at very beginning of process, and later

only if a default occursSBA oversight protections are in place – fairness board


GUARENTY ISSUES

A. GUARANTEES ARE REQUIRED1. Any party that owns 20% or more of

borrower will have to be a guarantor2. Transfers of ownership and then re-

transfers back are not allowed to avoid 20% rule (1 year look back)


BACK END ISSUES - DEFAULTS

A. BORROWER DEFAULTS1. Borrower can negotiate with lenders without SBA involvement2. Lenders are required to treat the loan like any similar loan in

portfolio3. Lenders do not need approval from SBA for most major

decisions in a workout situation4. SBA may purchase the loan from the lender (thus performing

under its guaranty), but usually leaves lender in place to service loan if there is a default, so you will be dealing with the original bank/loan officer, not someone from the SBA


More About The Faculty: D

CHRIS [email protected]

Mr. Cahill is counsel with Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience at national law firms representing very large debtors, and has counseled and litigated on behalf of manufacturers and secured lenders in large and middle-market cases.

Mr. Cahill also publishes frequently and speaks regularly on commercial insolvency issues. He is an executive editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2016) and is the host of Accredited Investor Markets Radio, a weekly broadcast for investors, on accreditedinvestormarkets.com.

mailto:[email protected]



TOM [email protected]

Tom Huffman is a Senior Vice President at Wintrust SBA Lending. Wintrust is a market leader in government lending solutions to Small and Mid-Size businesses in the Chicago and Milwaukee markets. Wintrust has the most robust product line of government loan programs. These programs include: SBA 7a, SBA CAP Line, SBA 504 and Illinois Advantage to name a few. Tom has 30 years of customizing financing solutions to Small and Mid-Size businesses throughout the Midwest. He previously held senior management positions at Ridgestone Bank, AMCORE Bank and First Bank, Inc. (St. Louis based). During Tom’s tenure, Ridgestone became a top SBA lender nationally.



KAREN [email protected]

Karen Lennon is the President of Wessex 504 Corporation, a company she created to provide SBA mortgage financing for expanding businesses in Illinois. Through Wessex and its predecessor company, she has funded thousands of businesses with loans totaling in excess of $500 million.

Karen has also been the angel investor and co-owner of four manufacturing and design firms. Prior to forming her own companies, Karen was with a Chicago regional bank where her duties included the purchase of suburban banks, as well as the creation of venture capital and investment management subsidiaries. Other work experiences include serving as staff attorney for the state housing financing authority and as a consultant to a major steel company. Karen has taught mathematics at the high school, junior college, and college levels.

In addition to her law degree, Karen has an MBA from the University of Chicago and a Masters degree in mathematics from the University of Illinois.



WILLIAM [email protected]

Will is the Vice President of Credit & Structure at Windsor Advantage.

He manages Windsor’s credit and structure department. This includes interfacing with lenders and other referral sources to ensure eligibility and the most efficient structure for each transaction. Will has helped fund over $400 million in SBA loans. Prior to joining Windsor, Will was an analyst at Bank of America Merrill Lynch.



GREG [email protected]

From 1990 on, Gregg has represented a wide variety of lending clients, which include local, regional and national financing companies and banks providing financing to small and middle-market businesses, with an emphasis on representing those clients in B & I, SBA 7a, SBA 504, Construction and other SBA Lending Programs. Gregg’s scope of representation includes: (i) review of the SBA Authorization, (ii) due diligence, (iii) loan document preparation and negotiation, (iv) closing and post-closing matters, (v) workout and liquidation of special situation loans, and (vi) review of loan portfolios for SBA Authorization Compliance audits, assignment, assumption and sale within the secondary loan market.Gregg has also taught numerous seminars regarding all of the foregoing. He has also developed and presented seminars entitled, “Introduction to Title Review: A Lenders Perspective”; ”Post Closing Compliance Seminar: Title Review, Survey Related Matters, Real Property Collateral Instruments, Revised Article 9 and Insurance”; “Introduction to SBA Lending: The Practitioner’s Guide”; “504 Loans”; “A Comprehensive Guide to Closing the SBA Loan”; and “Dispelling the Myths of Government Guaranteed Lending Programs” to several large lending institutions. Gregg is a member of NAGGL and was also an instructor for NAGGL and taught the Closing and Funding Course. Gregg is an associate member of NADCO. He has also received from the U.S. Small Business Administration the status of Designated 504 Closing Attorney.Gregg closes on average 100 “7a Loans”; 30 “504 Loans” and 12 “B&I Loans”, per year.

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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.