For Lenders: An Introduction to SBA’s CAPLine Programs
On September 15, 2011, SBA made sweeping changes to its CAPLine loan programs. The once very cumbersome, confusing, and paperwork intensive programs that were highly underutilized and overlooked by lenders, were re-tooled and streamlined to become more user-friendly. Loan limits were increased and the number of CAPLine programs reduced from five down to four (eliminated the Small Asset Based CAPLine). SBA even added the option of delegated processing for PLP Lenders using the SBA Express application forms, while giving all lenders the option of closing CAPLines using their own note and guaranty agreements! Also, gone are the days of having to be pre-approved to participate in what used to be called the Standard Asset Based Program. What we are trying to say is...now might be a good time to reacquaint yourself with what CAPLines can offer your customers!
Today is a new day at SBA. CAPLines are available to all lenders – now with a maximum loan size of up to $5 million, they also come with a 75 percent or 85 percent SBA guaranty, and a maximum maturity of 10 years (except on Builder’s CAPLines which is limited by regulation to five years).
The CAPLine family of loans, which includes the Working Capital CAPLine (formerly Standard Asset Based CAPLine), Contract CAPLine, Seasonal CAPLine and Builder’s CAPLine) offers lenders a wide range of financing tools to assist business customers. Whether your clients are simply looking to acquire inventory, build a spec home, or perform on a large government contract, SBA can help reduce your risk in the project.
Here is a quick overview of some additional program changes. SOP 50 10 5(e) provides more detailed information on each of the subprograms.
USES OF PROCEEDS
Borrowers must use the loan proceeds solely to finance the seasonal increases of accounts receivable and inventory (or in some cases associated increased labor costs). Funds must not be used to maintain activity during the slow periods of the business’s cycle.
The contractor must use loan proceeds only to finance the costs of one or more specific contracts, including overhead or general and administrative expenses, allocable to the specific contract(s). Contract CAPLine proceeds may not be used for permanent working capital, to acquire fixed assets, to pay delinquent taxes or similar funds held in trust (directly or indirectly), to refinance existing debt, to finance a contract in which significant performance has already begun, for change of ownership or floorplan financing. In addition, Contract CAPLines proceeds may not be used to cover any mark-up or profit. Further, advances of loan proceeds financing performance of one contract or sub-contract under a master agreement may not be used to finance the performance of another contract or sub-contract. Likewise, progress payments or proceeds received in the performance of a contract or sub-contract financed with this line must not be applied in repayment of a different contract or sub-contract. Funding and payment applications must be accounted for in conjunction with the specific contract or sub-contract to which they relate.
Borrowers must use the loan proceeds solely for direct expenses related to the construction and/or “substantial” renovation costs of a specific eligible project (residential or commercial buildings for resale), including labor, supplies, materials, equipment rental, direct fees (building permits, interim disbursement inspection fees, etc.), utility connections (above or below ground), construction of septic tanks, and landscaping. (“Substantial” means rehabilitation expenses of more than one-third of the purchase price or fair market value at the time of application.)
Proceeds paid to a subcontractor can include the subcontractor’s profit. The cost of land is eligible if the land cost does not exceed 20 percent of the project cost. Up to five percent of the project cost can be allocated for improvements that benefit all properties in a subdivision, such as streets, curbs, sidewalks, or open spaces.
The borrower must not use loan proceeds to purchase vacant land for possible future construction or to operate or hold rental property for future rehabilitation.
Working Capital CAPLines
Borrowers must use the loan proceeds for short term working capital/ operating needs. Proceeds must not be used to pay delinquent withholding taxes or similar trust funds (state sales taxes, etc.), or for floorplanning. In the event that Working Capital CAPLine proceeds are used to acquire fixed assets, lender must refinance the portion of the line used to acquire the fixed asset into an appropriate term facility no later than 90 days after lender discovers that the line was used to finance a fixed asset.
All liens must be perfected and the lien position verified prior to the initial disbursement. For seasonal, contract or builder loans which revolve for more than one season, contract or construction/renovation project, liens must be perfected prior to the initial disbursement for each season, contract or project.
The requirements for personal guaranties are the same as for any other 7(a) program.
Working Capital CAPLines
The requirement to take all available collateral is non-existent if you disburse based on a borrowing base certificate. The only requirement in this case is to obtain a first lien on the trading assets (A/R and INV). However, if your bank does not disburse based on a borrowing base certificate then you must have a first lien position on the trading assets (A/R, INV, etc.), AND ensure 1:1 collateral coverage (which may include the assignment of other business and/or personal assets).
Applicants must be able to provide the lender with a first lien position on the contract(s) and the proceeds of the contract(s) financed with the line, by assignment to the participating lender and proper UCC filing. As discussed in Chapter 7, Paragraph IV.H.2 of this Subpart, however, there may be exceptions to when an assignment is required.
The lender may take additional collateral in accordance with its policies and procedures governing its similarly sized, non-SBA guaranteed commercial lines of credit.
SBA will accept no less than a second lien position on the property being constructed or renovated if the purpose of the first lien was to acquire the property. If the property is part of a subdivision where the prime lender for the subdivision holds a first lien OR serves as partial collateral for a loan secured by more than one parcel of real estate, the first lienholder must provide a “release clause” for transfer of clear title to any eventual buyer of individual parcels upon receipt of a pre-established payment.
Do not take a second lien position if the first lienholder requires that the entire loan be paid in full before any property is released. Where Lender/SBA is in a second position, the total amount necessary to release the first and second liens may not exceed 80 percent of the fair market value (selling price) of the completed project.
On all CAPLines lender has the option of using its own note and guaranty agreements rather than SBA’s versions (SBA Forms 147, 148 and 148L).
Contract CAPLines: added guidance when the borrower is a prime vs. a subcontractor, when the contract involves surety bonding, and added the ability to finance a purchase order (previously only allowed in EWCP).
Working Capital CAPLines: Lender has option of closing and disbursing based on a BBC or not. If a BBC is not used, lender must follow stated underwriting, collateral and cash flow analysis standards and minimum monitoring requirements, including site visits.
If a BBC is used, lender must comply with revised requirements including the timing of the BBC (monthly not with each disbursement), pre-disbursement and annual field exams (rather than semi-annually), and eligible/ineligible receivables (including concentrations, which may exceed 20 percent with written justification in the file if certain types of accounts, otherwise requires SBA consent).
The level of funds control, regardless of whether a BBC is used or not, will depend on the banking relationship the lender has with the borrower.
Non-delegated: standard 7(a) application forms submitted to the LGPC.
Delegated: PLP lenders will use SBA Forms 1919 and 1920SX Parts A, B & C (SBA Express forms) as well as their own documents, including the Lender’s Credit Memorandum rather than the standard 7(a) application forms (which are used for other PLP loans). E-tran submission for SBA approval is required.