IFS Articles and Industry Resources

As we begin 2018, the IFS team pauses to reflect upon our many successes achieved, and the challenges we have overcome over the past nine years. More importantly, we take the time to thank our valued customers for the opportunity to be of service, and are grateful for the many fine business relationships we have established since our inception. 2018 Outlook Based on the current economic, political and lending environment, we at IFS expect 2018 to be rewarding and challenging for all lenders and borrowers. The U.S. economy appears to be well-positioned for continued improvement as a result of the newly approved Tax Reform Act, anticipated changes to healthcare costs, continued low inflation, and an increasing (but still low) interest-rate environment. Additionally, for Qualified Business borrowers, access to financing has broadened as financial institutions and the credit markets across the U.S. have healed from the paralyzing effects of the financial crisis. Accordingly, we expect the lending environment to continue to be robust, but remain very competitive especially within the middle-market, C&I and CRE segments – where continued pressure on net interest margin and ROE is likely to remain in place. We also believe SBA lending will continue to be a strong and stable lending segment. Participating lenders can expect to benefit from superior interest-rate spreads and incremental non-interest income generated through the sale of the guaranteed portion of loans to a very active secondary market, bolstering both liquidity and profitability. For those financial institutions considering SBA lending in 2018, there is no time like the present! Believe it or not, ALL federal and state chartered financial institutions are eligible to participate in the SBA 7(a) Guaranteed Loan Program. The approval process involves very little paperwork and takes less than a month to complete. With the assistance of an expert consultant [...]

The Small Business Administration (SBA) recently released an update to its Standard Operating Procedures, (SOP) 50 10 5(J), effective January 1, 2018. The SOP establishes the SBA’s procedures for supervision of and enforcement actions for SBA’s 7(a) Lenders, Certified Development Companies (CDCs), and Microloan Intermediaries as it relates to their SBA lending operations. This article is the first in a series of articles outlining the major changes Innovative Financing Solutions believes Lenders and Borrowers should be keenly aware of when utilizing an SBA loan for their financing needs. The following article highlights selected revisions in the new 410-page SOP 50 10 5(J) document, covering: Minimum Equity Injections Eligible Passive Company Rule Personal and Corporate Guarantees Express Loan Maturities and Default Provisions Minimum Equity Injections Previously, the SBA did not require a minimum equity injection from the Borrower and allowed the Lender to use prudent business judgement as to whether the pro forma debt to worth ratio was acceptable based on competition, management experience, and cash flow. However, this will change under the new SOP. Under the new guidelines, a minimum equity injection is required for loans to start-up businesses and in cases where there is a change in ownership between existing owners. Start-Up Businesses – At minimum, the SBA now requires an equity injection (from the applicant) of at least 10 percent of the total project for a start-up business to operate on a sound financial basis. In cases where there is a change in ownership resulting in a new owner, the SBA requires an equity injection of at least 10 percent of the total project. Seller debt may not be considered as part of the equity injection unless it is on full standby for the life of the SBA loan and it does not exceed half of the required equity injection. [...]

As banks continue to experience interest margin compression, lenders of all types are consistently seeking ways to earn non-interest fee income. This hunger for non-interest income has created numerous secondary markets for loans – including a Secondary Market for Small Business Administration (SBA) 7(a) loans. This article provides a brief overview of the criteria required to participate in the SBA’s Secondary Market; insights into the premium levels for various loan maturities and rate types; and reveals the magnitude of this market on a historical basis.  The selling of SBA 7(a) loans on the Secondary Market can provide a viable solution to increase non-interest fee income, facilitate lending to more borrowers, and increase the bank’s overall profitability. Nearly all banks – particularly community banks – can benefit from participating in the SBA’s Secondary Market to some degree. SBA’s Secondary Market The SBA’s Secondary Market was created to provide additional liquidity to lenders – expanding the availability of commercial credit for small businesses. In order to participate in the Secondary Market, a lender must be willing to sell the guaranteed portion of a SBA 7(a) loan utilizing SBA Form 1086, “Secondary Participation Guarantee Agreement,” in order to sell the guaranteed portion of the loan. This form is a legally binding document – which must be executed by the Lender, Registered Holder (or investor), Fiscal and Transfer Agent (“FTA”), and SBA – includes the terms and conditions that govern the sale and all subsequent servicing of the loan being sold. Much like any secondary loan market, there are various criteria that must be met in order to sell a 7(a) loan in this market. The lender must certify: The lender has underwritten, closed and serviced the loan in a prudent manner and in accordance with all SBA Loan Program Requirements; The lender will not share [...]

As energy costs continue to rise and climate change remains a major topic in the public’s mind, agricultural producers are increasingly seeking ways to increase their production of renewable energy – a strategy that not only reduces their energy costs, but simultaneously supports America’s mission to achieve energy independence and develop clean energy sources. To encourage this socially responsible activity in the agriculture sector, and to assist banks in lending to agricultural borrowers, the U.S. Department of Agriculture (USDA) created the Rural Energy for America Program (REAP). The REAP is administered by the USDA and provides financial assistance in the form of guaranteed loan financing and grant funding to agriculture producers and rural small businesses to purchase, install, and construct renewable energy systems; make energy efficiency improvements to non-residential buildings; use renewable technologies that reduce energy consumption; and participate in energy audits and renewable energy development assistance. Similar to other USDA loan programs, REAP loan guarantees and REAP grants protect lenders against potentially significant losses in the event of a borrower default. Use of Funds Funds from the REAP may be used to purchase, install and construct a multitude of renewable energy systems including: Biomass, geothermal for electric generation, hydropower below 30 megawatts, hydrogen, small and large wind and solar generation, and ocean generation (including tidal, current and thermal). These funds may also be utilized for the purchase, installation and construction of energy-efficiency improvements, including: Insulation, lighting, cooling or refrigeration units, doors and windows, electric solar or gravity pumps for sprinkler pivots, and can help finance the transition from direct diesel to electric irrigation motors, and to replace energy-inefficient equipment. Program Eligibility Eligible borrowers include producers with at least 50 percent of their gross income being generated from agricultural operations, and Small businesses in rural areas classified as eligible – To be eligible, businesses must be located in [...]

Many business owners in need of commercial financing often find themselves unprepared to complete the loan application and undergo the loan approval process. Banks require a significant amount of financial and related information, as well as supporting documentation in order to complete the underwriting of a loan in order to gain loan approval. As a result, many business owners become frustrated when the process moves slowly – and it often seems as if there is a never-ending need for additional information and documentation. However, by being prepared before approaching your lender, the loan approval process can go much more smoothly and a great deal of time can be saved between the point-of-loan application and final loan approval.  The key is to be ready and prepared! Typically, lenders will request the following information from prospective borrowers: The specific dollar amount of the loan request and intended uses of the loan proceeds Supporting agreement(s) of sale, quotes, invoices, and a detailed cost budget The legal name and address of the borrowing entity and details of the ownership structure A detailed background and history of the borrower, operating company, real estate holding company and related business entities (as applicable) A detailed business plan for start-ups, requests for significant expansions, and business acquisitions. Four (4) years of federal tax returns of the borrower, operating company, real estate holding company and related business entities If available, four (4) years of accountant prepared financial statements of the borrower, operating company, real estate holding company, and related business entities Interim financial statements – dated within 90-days of the loan request – of the borrower, operating company, and related business entities Four (4) years of Federal Tax Returns of the principal(s)/owner(s) The most recent personal financial statements of the principal(s)/owner(s) A resume or biography of the principal(s) and [...]

Expanding Your Lending Toolbox with Government Loan Programs Creating strategic alliances is a common practice for many businesses – and today, community banks are increasingly discovering the value of aligning their organizations with lending specialists in order to compete in the hyper-competitive lending market. These strategic alliances enable banks to offer lending products outside of their traditional “lending toolbox” and capture greater market share. By their very nature, community banks must run lean and efficiently in order to sustain profitability -- while also keeping a keen eye on credit risk assessment and mitigation. But building a lending operation – whether it’s a C&I, CRE or any specialty lending platform is costly – reaching hundreds of thousands of dollars per year when you consider the costs to employ and train business development officers, credit underwriters and loan administrators. Teaming Up with a Government Loan Specialist Forming a strategic alliance with an expert in government loan programs is an example of how community banks can rapidly create new business opportunities in a lending specialty where loan demand is evident, but cost control is a priority. Outsourcing to a government lending specialist – commonly referred to as a Lender Service Provider, provides a low-cost and low-risk solution for community banks because they can immediately offer these lending products to their clients and prospects with little to no increased overhead, while simultaneously generating a new income stream. The benefits for community banks that offer government loan programs via a strategic alliance with a Lender Service Provider are significant and include: Careful Management of Fixed Costs – Controlling costs is critical when entering an unproven market, and partnering with a government loan specialist allows banks to tie a variable cost structure to a variable revenue stream. Eliminating the “Learning Curve” – Government lending is highly specialized, requiring intimate knowledge of [...]

The U.S. Small Business Administration (SBA) was officially established in 1953, and over the past six-plus decades has provided millions of loans and other forms of financing to small businesses across the U.S., Puerto Rico, the U. S. Virgin Islands and Guam. The SBA works with lenders to provide loans to small businesses and is responsible for establishing guidelines for loans extended by lenders, community development organizations and other lending institutions; and it guarantees these loans will be repaid – mitigating much of the risk associated with lending to smaller and “riskier” businesses. Over the years, many community banks have avoided offering government loan programs for various reasons – the most common being the lack of a clear understanding of these programs. But the simple fact is, providing a full slate of lending solutions to small businesses is important, and gaining an understanding of these loan programs is not as complex as it may appear. The following is an easy-to-follow overview of the three most widely utilized loan programs offered by the SBA and the U.S. Department of Agriculture (USDA): SBA 7(a) Loan Guaranty Program   Use of Loan Proceeds Real estate construction, purchase, expansion & refinance (minimum 51% owner-occupied) Working capital Purchase of furniture, fixtures, machinery & equipment Business start-up or acquisition Qualifiers/Details Businesses must be For Profit Tangible Net Worth < $15,000,000 and Net Income After Tax < $5,000,000 (2-Year Average) Maximum loan amount of $5,000,000 Loan guaranty up to 90% of the loan amount with a maximum guaranty of $3,750,000 Maximum variable interest rate = Wall Street Journal Prime Rate + 2.75% or LIBOR alternative Loan guaranty fee ranges from 2% to 3.75% Loan terms vary depending on use of loan proceeds Benefits to Participating Banks U.S. Government Guaranty of up to 90% of the loan amount under the SBA [...]

Today, we live in a highly competitive global business environment – an environment where businesses of all types must consistently develop new strategies to outsell their competitors beyond domestic market borders. While some companies continue to serve regional or national domestic markets, the evolving global economy has heightened awareness among business owners of the significant growth opportunities available via exporting their products and services overseas. Expanding into overseas markets is not a new concept by any means, but it is a significant strategy shift for many smaller business owners who are already capital constrained and believe exporting products and services can only be successfully accomplished by large companies. On the contrary, the majority of U.S. exporters are actually small businesses. This strategy shift presents opportunities for lenders to provide new and innovative financing options to customers and prospects by improving their overall competitive position in global markets. One vehicle is through a little known program created by the Small Business Administration (SBA) called the International Trade Loan (ITL). The ITL program assists borrowers impacted by import competition and those seeking to enter the export market or expanding existing export sales. The ITL program can finance a combination of debt refinancing, working capital, and fixed assets with the benefit of the SBA’s maximum 90% guaranty on the full loan amount.   A common misconception is that the ITL program is limited to traditional exporters (manufacturers or distributers); however, many service companies can qualify such as IT Consulting Firms, Web Developers, and even Hotels with significant tourist volume. A business can even qualify if its products are exported indirectly through its customers! As lenders, we are all facing hyper-competitive forces in the market. The SBA’s ITL program provides the unique ability to minimize lending risk and assist borrowers with meeting their growth objectives. [...]

On behalf of our entire team, I am excited to share with you the first issue of Innovative Financing Solutions’ Monthly Newsletter – IFS Viewpoints. Developed specifically with lenders and finance professionals in mind, each Newsletter will deliver thought leadership articles authored by our senior executive team covering topics such as: Small-business lending strategies, borrower and lender success stories, the impact of the evolving regulatory environment on commercial lending, and unique lending solutions available for small- and mid-sized borrowers. Each Newsletter will also feature educational articles providing valuable resources created to educate lenders in banks of all sizes and finance professionals on the unique benefits of providing Small Business Administration (SBA) and U.S. Department of Agriculture (USDA) lending products and services to small- and mid-sized businesses that do not qualify for conventional commercial financing. These educational articles will also provide insights into conventional and alternative financing strategies utilized in various markets. IFS’ experience in this lending segment is vast and our success over the years is the direct result of our ability to partner closely with community banks and finance professionals to expand their lending capabilities to meet the needs of small- and mid-sized business borrowers. As this is our first Newsletter, we welcome your feedback on how we can make this series most valuable for you. Please send me your comments and suggestions for what you would like to see in future issues of Innovative Financial Solutions’ Monthly Newsletter – IFS Viewpoints. Please be sure to read our first educational installment on the SBA’s International Trade Loan program! Best regards, Michael Ryan Michael Ryan, President mryan@InnovFS.net 484.485.2756