SBA SOP 50 10 8, B.Ch3.D.3 — CAPLines-Specific Loan Closing and Disbursement Requirements

v) Monitor the lines consistent with the Lender’s policies and procedures for its similarly-sized, non-SBA guaranteed commercial lines of credit and, at a minimum, conduct a credit review including cash flow analysis, collateral analysis to ensure there is a 1:1 collateral ratio, owner/guarantor (except Supplemental Guarantors) credit review and site visit on an annual basis. vi) Proceeds from cash sales and receivable collections must pay down the line as collected consistent with Borrowers operating cash cycle. vii) If required, Lenders must report the initial disbursement consistent with their similarly-sized, non-SBA guaranteed commercial loans in accordance with Ch. 5, Para. D.4.c., Additional required documents include:, in this Section. b) If the Lender will use a BBC to determine the availability of funds for disbursement the lender must adhere to the following: i) Loan proceeds may be disbursed to the Borrower’s operating account. To calculate the maximum amount available for disbursement, use the following formula: Eligible A/R $ Multiplied by advance rate (multiplied by) % Equals A/R Borrowing Base (BB) = $ Eligible inventory $ Multiplied by advance rate (multiplied by) % Equals Inventory BB = $ Total A/R & Inventory BB: (A/R BB + Inventory BB) $ Face amount of Note $ Borrowing base (Lesser of Total A/R & Inv BB or Note) $ Subtract loan balance on books (minus) $ Equals Amount available for disbursement $ ii) No less than monthly, Lender should determine the amount of eligible assets for the borrowing base.

(a) When advancing against receivables, Lender should: Obtain an aging of accounts receivable and accounts payable; Eliminate all ineligible receivables. The following types of accounts are not eligible to be included in the borrowing base: (a) Any invoice more than 90 days past due. Exceptions are permitted over the 90 day with SBA’s prior written concurrence. To avoid unnecessary disqualification of receivables, the Borrower may structure their receivables terms so that the due date properly reflects the cash conversion cycle (timely payment) of the customer.

(b) If a customer is delinquent on more than 50% of its total outstanding invoices, ALL of the accounts due from that customer are ineligible. To re-establish the customer’s accounts as eligible, all delinquent accounts must be paid in full. Exceptions are permitted if the Lender obtains SBA’s prior written concurrence.

(c) All re-billed accounts. (Re-billing is the practice of issuing a credit to a customer and re-invoicing the obligation in the current billing cycle. If the re-billing occurs on the same day in order to correct a clerical error, the accounts do not have to be excluded.)

(d) Foreign receivables not backed by documentary or standby letters of credit, factor’s guarantee (of purchase), credit insurance (either commercial risk or commercial and political risk combinations), or Government enhancements such as those provided by the Export Import Bank or the World Bank.

(e) Offsetting receivables and payables between the Borrower and one of its creditors (contra accounts).

(f) Accounts due from affiliate companies.

(g) Accounts that require subordination to other parties, such as Governmental contracts where the bonding company requires assignment of the project’s receivables. (b) When advancing against inventory, a Lender should: Obtain a description of inventory and its value; and Limit advances to the following types of inventory: (a) Finished Goods: Eligible if readily saleable and not obsolete. (b) Work in Progress: Eligible if Lender obtains SBA’s prior written concurrence. (c) Commodities or Raw Materials: Eligible. (c) The dollar amount of ineligible receivables and inventory will remain unchanged for the entire month. The actual borrowing availability may increase or decrease as the balance on the line changes and the receivables and inventory are generated or converted back to cash. (d) A BBC is required at least monthly to determine the amount that can be disbursed. Lender may require a BBC more frequently consistent with its policy and procedures on similarly-sized non- SBA guaranteed commercial lines of credit. Lenders may use their own forms for the BBC. A sample BBC is provided in Appendix 9. iii) Repayments will come from cash sales and receivable collections. Proceeds must pay down the line as collected with availability to re- advance as long as the Borrower is conforming to the maximum amount of the BBC. iv) If a cash collateral account is being used and a balance remains in the cash collateral account after the loan has been paid down to zero, those funds may be credited to Borrower’s operating account. There is no provision for interest only payments. Interest must be paid at least monthly either from Borrower’s own resources OR from loan proceeds at the time of an advance. Principal payments should be tied to the Borrower’s cash cycle. v) Lenders must report the initial disbursement on SBA Form 1050 or Lender equivalent in accordance with Ch. 5, Para. D.4.c., Additional required documents:, in this Section. vi) Advance Rate for Accounts Receivable: (a) The maximum advance rate cannot exceed 80% of the eligible receivables. The maximum advance rate may go up to 90% of the eligible receivables if the receivable is a prime Federal contract and the Lender has obtained an assignment of the contract proceeds under the Assignment of Claims Act of 1940 (the Act), 31 U.S.C. 3727, or the Borrower is a subcontractor and the prime contractor has obtained an assignment under the Act and the contract proceeds will be disbursed by a third party funds control facility or the foreign accounts receivable are insured by the Export-Import Bank or a major private insurer. Additional exceptions may be permitted if the lender obtains SBA’s prior written concurrence. The advance rate should not include any net profit. Factors that should be taken into consideration when determining the maximum advance rate are: Control and accounting systems of the Borrower; Enhancements such as credit insurance; Age of receivables; Credit quality & Borrower’s credit policy; Turnover history; Industry orientation and condition; and Net profit margin. (b) After initial disbursement, Lenders have unilateral authority to increase or decrease the advance rate for receivables by as much as 5% above or below the rate stated in E-Tran. Increases or decreases in the advance rate above 5% require SBA’s prior written concurrence. vii) Inventory Advance Rate: (a) The maximum advance rate cannot exceed 50% of eligible inventory. Exceptions are permitted if the lender obtains SBA’s prior written concurrence. Factors to consider when determining the maximum advance rate are: Material and labor costs in manufacturing or invoice costs (less discounts) of resale goods in wholesale distribution; Nature of the product; Product liability; Manufacturer’s buyback agreements; and Physical location of inventory (single locations are generally easier to control than multiple locations). (b) After initial disbursement, Lenders have unilateral authority to increase or decrease the advance rate for inventory by as much as 5% above or below the rate stated in E-Tran. Increases or decreases in the advance rate above 5% require SBA’s prior written concurrence. viii) Examinations: If the Working Capital CAPLine is over $1,000,000, Lender must conduct an annual field examination. The field examination may be conducted by the Lender’s staff or a third party. An examination is a physical verification of the assets which compose the borrowing base. Examinations must include a sampling of the assets (receivables and inventory) included in the borrowing base. The frequency of the examinations may be determined by the Lender based upon the quality of the records, risk profile of the Borrower and seasonality of the line. At a minimum, an examination must be conducted prior to the initial disbursement and annually thereafter. The Lender must describe the level and frequency of examinations in the credit memorandum for the line. ix) Monitoring: The minimum monitoring requirements for Working Capital CAPLines are as follows: (a) Monthly–- BBC; Aging of accounts receivable/payable; and Inventory listing (if advanced against); (b) Quarterly – Borrower prepared financial statements; and (c) Annually – Borrowers management information system; legal elements; loan agreements; NAICS review; review of cash flow and related financials: and reassess exam, monitoring and control requirements. If the Working Capital CAPLine is $1,000,000 or less, credit review including cash flow analysis, concentration analysis, collateral analysis, owner/guarantor (except Supplemental Guarantors) credit review and annual site visit. Accounts from any one customer that constitute more than 20% of the total outstanding receivables should not be included in the eligible borrowing base unless the account is a public company with at least an A rating, a Federal government account, the customer has a long-standing positive credit history with the Borrower, the customer is a prime or sub-contractor performing on a Federal government contract, or the accounts are insured through credit insurance (common for foreign accounts receivable). If the account meets one of those five conditions, the Lender does not need to obtain SBA’s prior written concurrence to include the account above the 20% in the eligible borrowing base but must include a written justification in the loan file. If, however, the account does not meet one of the five conditions, then the Lender must obtain SBA’s prior written consent in order to include the account in the eligible borrowing base. Such requests must be sent to the LGPC. If the Working Capital CAPLine is over $1,000,000, credit review including cash flow analysis, concentration analysis, collateral analysis, owner/guarantor (except Supplemental Guarantors) credit review and annual field examination. Accounts from any one customer that constitute more than 20% of the total outstanding receivables should not be included in the eligible borrowing base unless the account is a public company with at least an A rating, a Federal government account, the customer has a long-standing positive credit history with the Borrower, the customer is a prime or sub- contractor performing on a Federal government contract, or the accounts are insured through credit insurance (common for foreign accounts receivable). If the account meets one of those five conditions, the Lender does not need to obtain SBA’s prior written concurrence to include the account above the 20% in the eligible borrowing base but must include a written justification in the loan file. If, however, the account does not meet one of the five conditions, then the Lender must obtain SBA’s prior written consent in order to include the account in the eligible borrowing base. Such requests must be sent to the LGPC. ii. Level of Funds Control: The level of funds control for a Working Capital CAPLine, whether a BBC is used or not, is determined by the banking relationship the lender has with the Borrower. a) If the Lender has the Borrower’s deposit accounts, the Lender is not required to use cash collateral accounts or other types of controlled accounts but must follow its established procedures for its similarly- sized, non-SBA guaranteed commercial lines of credit to monitor payments received. b) If the Lender does not have the Borrower’s deposit accounts, then the Lender must use some form of controlled account as follows: i) The customers of the Borrower can be instructed to send their remittances via joint payee checks payable to lender and Borrower to the Lender; or ii) Lock box (bank account under Lender control where Borrower’s customers remit payments for accounts receivable). iii. For Working Capital CAPLines, final disbursement must occur far enough in advance of maturity so that a sufficient amount of time is available for the assets financed with the proceeds to be converted back to cash and available to make final payment at maturity. The date of final disbursement must be established in E-Tran and should be reflective of the time required to permit orderly repayment by the maturity date. Disbursements after the last cash cycle has begun, but before maturity, require SBA’s prior written approval. However, if maturity coincides with the scheduled annual review of the line, including an annual review conducted by Lender coincidental with the maturity of the line, Lender may advance on the line up to maturity in conjunction with the Lender’s annual review in accordance with Lender’s policies and procedures on its similarly-sized non-SBA guaranteed commercial lines of credit. No advances can be made after maturity. When a balance exists on a CAPLine at maturity, the lender should consider the following: a) Enforce final collection; b) Renew the line without SBA’s guaranty; c) Renew the line, requesting SBA’s guaranty (new application required if maturity has reached 10 years); d) Term out any outstanding balance, with SBA’s concurrence. SBA’s guaranty would remain in place but there could be no new advances; and/or e) Commence liquidation of supporting collateral.