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SHARED FIRST LIEN PARI PASSU |
 SBA 7a financing allows the lender and the small
business a great deal of flexibility in loan structure and use of proceeds. Sometimes due to complex variables within
a loan structure, a shared first lien pari passu position may be an option, or it may be required. One of the key advantages to the SBA 7a program is allowing multiple use of proceeds within one loan. This can
include financing for real estate, leasehold improvements, equipment, working capital and goodwill. An opportunity may
arise where the multiple use of proceeds exceeds the SBA 7a maximum financing amount of $5 million. For example, a business acquisition that includes the purchase of real estate for $4 million, equipment for $2.5 million
and goodwill of $3 million, can be a great pari passu candidate. By structuring the financing with a $5 million SBA
7a loan and a $2 million conventional loan with a shared first lien, the bank is able to extend to the customer a financing
option that meets their needs and reduces the credit exposure to the bank. In this example: - $5
million SBA guaranteed loan for 25 years, use of proceeds are $3.6 million real estate, $1.2 million goodwill and $0.2 million
closing costs and working capital
- $2 million conventional loan, use
of proceeds are for equipment with a OLV of $2 million
- Both loans are
secured by a shared first lien pari passu on real estate and all business assets.
- Shared first lien is based pro rata on the outstanding principal balances; in this case 71% SBA guaranteed loan
and 29% conventional loan
- Bank's exposure is $3.25 million ($1.25
million unguaranteed portion of SBA loan and $2 million conventional loan)
An example of when a shared first lien pari passu structured is required is in the event
of a business acquisiton transaction and the borrower is acquiring the small business' real estate in a separate transaction
with a non-SBA guaranteed loan. In this case the SBA guaranteed loan must receive a shared lien position on the real
estate with the non-SBA guaranteed loan. Using the above example, if the loan were structured
with a non-SBA guaranteed loan for the real estate, say at $3.8 million and a SBA guaranteed loan for the remainder of the
use of proceeds; then the SBA loan would be required to obtain a shared first lien on the real estate in order to remain eligible
for the guaranty. Structuring the loan use of proceed in these lending opportunities is
best done upfront in the loan process to set the right expectations. One of the expectations that should always be set
is an understanding of flexibility from all parties. Our goal is to find the best solution for the business borrower
and the bank. An understanding of flexibility from all parties is needed as values for real estate, equipment and business
value are only early estimates and subject to formal valuations. By establishing the basics of the structure and
the spirit of shared risk between buyer, seller and bank, the process from application to closing can be more customer
friendly. |
PROVIDING THE HELP YOU NEED |
Structuring & Eligibility |
With
decades of industry experience and functional expertise, Waterstone LSP goes beyond the norm to develop new business, and
provide SBA lending solutions and processes. Our services are designed specifically to assist community banks and their small
business customers. We help community banks compete against the big banks. Learn More |
SBA SMALL LOAN INITIATIVE VERSUS PRUDENT LENDING |
On Tuesday, June 10, 2014, SBA Administrator Maria
Contreras-Sweet announced in a speech to the Center for American Progress in Washington D.C. a key policy change for SBA 7(a)
loans in the amount of $350,000 or less. Within the current SOP, small loans are defined as loans $350,000
or less and by using the SBA's predictive scoring model, can be submitted with abbreviated loan analysis.
However, the model still requires lenders to exercise prudent lending practices, including performing a debt
coverage ratio analysis in its underwriting. The SOP states: "The Small
Business Applicant's debt service coverage ratio exceeds 1:1 on a historical or projected cash flow basis" Beginning July 1, 2014, this requirement may
now have changed. Per the Administrator's announcement on the June 10th, she states: We're now so confident of our model's predictive value on small loans that we're eliminating
cumbersome and impeding analyses of a company's cash flow, a step that can delay loan decisions. Effective next month,
I'm directing that SBA's total credit scoring model be made available to all our lending partners for loans of $350,000
or less. We're making these changes knowing it will simplify and streamline the lending process and get more small loans
into the hands of entrepreneurs,
especially the underserved. This change is still subject to the issuance of a policy notice, but if such occurs, Waterstone will still perform a
business debt service coverage analysis as well as a global debt service coverage anlaysis on all SBA 7(a) loans underwritten.
It is our position that while small loans carry a small non-guaranteed risk to the lender, it is still our priority to
assist lenders with prudent lending anlaysis, properly assessing risk for the lender's fomral credit decision. |
PROVIDING THE HELP YOU NEED |
Structuring & Eligibility |
With
decades of industry experience and functional expertise, Waterstone LSP goes beyond the norm to develop new business, and
provide SBA lending solutions and processes. Our services are designed specifically to assist community banks and their small
business customers. We help community banks compete against the big banks. |
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