What Senior Management Needs to Know about the

“Small Loan Advantage Program”

Coleman

May 30, 2013 A Coleman Webinar

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Small Business Lending - Industry Briefing

Featuring Bob Coleman & Charles H. Green

1:50 - 2:00 PM E.T.

Log on 10 minutes early before every Coleman webinar

for a briefing on issues vital to the small business lending

industry with your hosts:

Bob Coleman, Editor of the Coleman Report &

Charles H. Green, Small business financing expert and

author of bestselling The SBA Loan Book, 3rd Edition.

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How to Ask Questions

• Use Go‐to‐Meeting's chat function, you can

choose to ask question in writing or verbally.

If comfortable, give us your first name, name

of bank, and city.

• Send an email to bob@colemanreport.com

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Moderator

Bob Coleman

Editor

Coleman Report

Bob Coleman is the Author of “Money Money Everywhere and Not a Drop for Main Street“. Coleman is the Editor of the Coleman Report, a trade newsletter for small business bankers. He is the nationally recognized expert on small business financing. He has appeared on Fox Business News and CNN and has been quoted by all major financial media outlets including the Wall Street Journal, New York Times and Bloomberg. He has spoken at numerous small business banking events across the United States, including international engagements in the U.K. and Germany. Coleman has a B.A. in Medieval History from the University of California Santa Barbara and a M.B.A. in Real Estate Finance from the University of Southern California.

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Panelist

Fred Crispen

Sr. Vice President

Celtic Bank

Fred Crispen manages the Celtic Bank, Celtic Express Lending Division on a nationwide bases. He utilizes the SBA Patriot Express, Export Express and SLA II Programs to make working capital loans from $20,000 to $150,000.

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Panelist

Susan Lamping

Senior Community Loan Officer

CDC Small Business Finance

Susan Lamping has overseen the Community Lending activities at the CDC for the last eleven years. She assists local businesses meet their technical assistance and financing needs through a variety of different sources. She acts as the liaison for the technical assistance needs of small businesses in San Diego, Orange, Riverside, San Bernardino and Imperial Counties, utilizing partner organizations to link clients with the appropriate business assistance. In partnership with some of the local banks in San Diego, she assists borrowers in acquiring SBA financing as well as financing through alternative sources.

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Summary

• Keep it Simple

• Automate Everything,

• But, a Human Touch

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How do you want a $50 million 7(a) portfolio Structured?

• 25 -- $2 million loans

or

• 500 -- $100,000 loans

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Definition

• Maximum Loan Size -- $350,000

• Guaranty – 85% -- Up to $150,000

• 75% -- Above $150,000

• Small Loan Advantage is designed to encourage existing SBA lenders to make lower-dollar amount loans, which often benefit businesses in underserved markets.

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Why Embrace SLA?

• SBA is taking the credit risk for the credit scoring model

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Credit Scoring Model

• Consumer Credit Score

• Business Bureau Data

• Borrower Financials

• Loan Application Data

The SLA credit score is not to be confused with the Small Business Predictive Score (SBPS) used by SBA’s Office of Credit Risk Management, which is a management score.

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Credit Scoring Model

The minimum SLA credit score is based on the lower end of the risk profile of the current SBA portfolio and may be adjusted up or down from time to time. The minimum credit score required for the application to be processed as an SLA application is 140. If it falls below this credit score, the application may be submitted under our other loan programs.

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Credit Scoring Model

• Fair Isaac

• Small Business Scoring Model (Liquid Credit)

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Considerations in Developing your own Model

• SBA Approval?

• 3rd Party Modeling

Lenders must validate (and document) with appropriate and accepted statistical methodologies that their business credit scoring model is predictive of loan performance and they must provide that documentation to SBA upon request. In addition, the business credit scoring results must be documented in each loan file and available for SBA review 14

You can do SLA without A Credit Scoring Model

• But what’s the Point?

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Credit Memorandum

The lender must perform a thorough and complete credit analysis of the applicant in order to ensure that the loan is of such sound value as to reasonably assure repayment and this credit analysis must be documented in the loan file.

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Credit Memorandum

• Consistent with lender’s similarly-sized non-SBA guaranteed commercial loans • Cash flow analysis to determine the adequacy, duration and dependability of cash flow • In the case of a small business applicant doing business less than two years, projected cash flow analysis • Owner/Guarantor analysis.

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Credit Scoring Assumes

• Character • Reputation • Credit History

This may be conducted using a risk management or credit scoring model if the lender uses such a model to review its similarly-sized, non-SBA guaranteed commercial loans. If the lender does not have the ability to systematically analyze the borrower, the lender must collect and analyze business tax returns.

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Credit Scoring

Lender’s credit decision must consider the length of time in business under current management and, if applicable, the depth of management experience in this industry or a related industry. Such analysis should include a brief description of the management team of the company. Lenders must verify the accuracy of the applicant’s financial data against income tax data by submitting IRS Form 4506-T,

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Cash Flow

Debt Service Coverage Ratio exceeds 1:1 on a projected basis; and With the exception of loans under $50,000, the Small Business Applicant’s global cash flow coverage ratio exceeds 1:1 on a projected basis.

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Debt to Worth

Lender must determine if the equity and the proforma debt-to-worth are acceptable based on its policies and procedures for its similarly-sized, non-SBA guaranteed commercial loans.

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Equity Injection

If the lender requires an equity injection and, as part of its policies and procedures for its similarly-sized, non-SBA guaranteed commercial loans verifies the equity injection, it must do so for SLA loans.

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Other Credit Issues

• Collateral Issues • Life Insurance Issues

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SBA Approval Process

Most Small Loan Advantage loans will be approved in a matter of minutes through electronic submission (e-Tran). Non-delegated Small Loan Advantage loans will be approved within 5 to 10 days

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Documentation

• Lender’s Loan Documents • SBA Loan Documents

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Credit Policy

• Credit Box Components • Credit Elsewhere Rule

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SBA Secondary Market

• Regular SBA 7(a) Process • Under $50,000 will lose 2-4 points • However, higher interest rates can offset the loss

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Technology

• Loan Platforms • Vendors

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Prequalification

• To help the lender decide creditworthiness for lower-dollar loans, the lender can obtain certain data from the applicant and then get a pre-qualification indication from SBA as to the acceptability of the applicant for a loan guaranty. • If the pre-qualification comes back positive, the lender may complete a streamlined credit memo and make a formal request to SBA for guaranty. • Lending through the new Small Loan Advantage initiative is open to all of SBA’s PLP lenders for 7(a) loans of up to $250,000 with the regular 7(a) government guarantee.

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Management Strategies

• Keep it Simple • Automate • The Human Touch

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Management Strategies

• This is a different Product than “normal” SBA 7(a) Loans • Credit Box • Loan Size • Department Volume • Staffing

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Should you partner with an Alternative Lender?

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Liquidation Issues

• Fresno/Little Rock processing • Collateral liquidation issues

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Community Advantage

Mission Focused Community Advantage is open to mission-focused lenders, including Community Development Financial Institutions, SBA’s Certified Development Companies and SBA’s nonprofit microlending intermediaries.

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Underserved Market

· Community Advantage lenders will be expected to maintain at least 60 percent of their SBA loan portfolio in underserved markets, including loans to small businesses in, or that have more than 50 percent of their workforce residing in, low-to-moderate income (LMI) communities; in Empowerment Zones and Enterprise Communities; in HUBZones; start-ups (firms in business less than 2 years); and veteran-owned businesses and those that would be eligible for Patriot Express.

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Technical Assistance

· Community Advantage leverages the experience these institutions already have in lending in economically-challenged markets, along with their management and technical assistance expertise to help make their borrowers successful.

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Link to 35 Page Community Advantage Participating Guide

http://www.sba.gov/sites/default/files/files/Community%20Advantage%20Participant%20Guide%203_0%20(Final%20Version%2011-13-2012).pdf

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Key Differences From 7(a)

· Maximum Loan Size is $250,000 · Maximum Interest Rate is Prime +6%

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Takeaways

• Keep it Simple • Automate • The Human Touch

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Questions?

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Bob Coleman Editor Coleman Report (818) 974 8934 (direct) (626) 824-9431 (Joe Coleman, alternate contact) bob@colemanreport.com or joseph@colemanreport.com