SBA SOP 50 10 8.1, B.Ch4.F — CAPLines-Specific Loan Closing and disbursement requirements

(b) Eliminate all ineligible receivables. The following types of accounts are not eligible to be included in the borrowing base: (i) 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. (ii) 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. (iii) 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.) (iv) 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. (v) Offsetting receivables and payables between the Borrower and one of its creditors (contra accounts). (vi) Accounts due from affiliate companies. (vii) Accounts that require subordination to other parties, such as Governmental contracts where the bonding company requires assignment of the project’s receivables. ii) When advancing against inventory, a Lender should:

(a) Obtain a description of inventory and its value; and

(b) Limit advances to the following types of inventory: (i) Finished Goods: Eligible if readily saleable and not obsolete. (ii) Work in Progress: Eligible if Lender obtains SBA’s prior written concurrence. (iii) Commodities or Raw Materials: Eligible. iii) 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. iv) 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. c) 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. d) 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. e) Lenders must report the initial disbursement on SBA Form 1050 or Lender equivalent in accordance with Ch. 6, Para. D.4.c. in this Section. f) Advance Rate for Accounts Receivable Advance Rates: i) Eligible domestic accounts receivable: 80%. ii) Eligible insured foreign accounts receivable: 90% iii) Eligible accounts receivable for prime Federal contracts: 90% (a) To be eligible as a prime Federal contract, the Lender must have 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. iv) 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: (a) Control and accounting systems of the Borrower; (b) Enhancements such as credit insurance;

(h) Offsetting account receivables and payables between the Borrower and one of its creditors (contra accounts). To determine net eligibility in these situations, the eligible accounts receivable must be reduced by the entire amount of the accounts payable. ii) 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 the SBA Loan System. Increases or decreases in the advance rate above 5% require SBA’s prior written concurrence. h) Inventory Advance Rate: i) The maximum advance rate cannot exceed 50% of eligible inventory. No advances are permitted on inventory located outside the United States. ii) Exceptions are permitted if the lender obtains SBA’s prior written concurrence. Factors to consider when determining the maximum advance rate are:

(a) Material and labor costs in manufacturing or invoice costs (less discounts) of resale goods in wholesale distribution;

(b) Nature of the product;

(c) Product liability;

(d) Manufacturer’s buyback agreements; and

(e) Physical location of inventory (single locations are generally easier to control than multiple locations). i) Inventory Restrictions: i) The following types of inventory are not eligible for inclusion in a Working Capital CAPLine. (a) Inventory that is not subject to a valid, perfected, and enforceable first priority lien in favor of the Lender. (b) Inventory located at an address that has not been disclosed to the Lender in writing. (c) Inventory that is not located in the United States. (d) Inventory that is placed by the Borrower on consignment or held by the Borrower on consignment. (e) Demonstration inventory.

(f) Inventory that consists of proprietary software, spare parts, or any other class of inventory not intended for resale; and

(g) Inventory that is damaged, obsolete, returned, defective, recalled, or unfit for further processing. j) Annual and Renewal Credit Reviews i) On not less than an annual basis, and as part of any renewal of the loan, the Lender must obtain updated year end and interim financial statements and perform a full review of the credit and collateral securing the Working Capital CAPLine loan. The Lender’s analysis must document that the Applicant: (a) Is creditworthy. (b) Has the reasonable assurance of repayment in a timely manner from the conversion of sales into cash: and (c) Is in compliance with program requirements. ii) If the Lender’s analysis does not document that all three of the above requirements are met, no further disbursements may be made, and the loan may not be renewed until the Applicant can demonstrate that it meets the above three requirements. iii) 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 the SBA Loan System. Increases or decreases in the advance rate above 5% require SBA’s prior written concurrence. k) Examinations: If the Working Capital CAPLine is over $1,000,000 or greater, 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. l) Loan Monitoring: Most Working Capital CAPLines are administered using a Borrowing Base Certificate. When administering a line of credit with a BBC, below are the minimum requirements for the frequency of reporting. The Lender may require a BBC more frequently than stated below if it does so in accordance with the policies and procedures the Lender uses for its similarly-sized non-SBA guaranteed commercial lines. The minimum monitoring requirements for Working Capital CAPLines are as follows: i) Monthly–- BBC; Aging of accounts receivable/payable; and Inventory listing (if advanced against); ii) Quarterly – Borrower prepared financial statements; and iii) For Working Capital CAPLine loans of $2,000,000 or less, the Lender must obtain BBCs at least quarterly. iv) For Working Capital CAPLine loans greater than $2,000,000, the Lender must obtain BBCs at least monthly. m) BBC Collection i) The Lender must obtain the appropriate accounts receivable, accounts payable, and inventory reports necessary to determine its collateral position and for the coming period. Lenders may use their own forms for the BBC. ii) Most Lenders require that the BBC be received by the 15th day of the following month. Lenders may choose when the BBC is due, but in no case may the due date be more than 30 calendar days after the end of a month. iii) If the Borrower fails to submit the required monthly BBC to the Lender within 60 days of the month end, advances on the line of credit must stop until the BBC is obtained and the loan is confirmed to be In Margin. iv) If the Borrower fails to submit the required quarterly BBC to the Lender within 30 days of the month-end, advances on the line of credit must stop until the BBC is obtained and the loan is confirmed to be In Margin. v) When the line is not in use with no outstanding principal balance and is not supporting the issuance of any letters of credit, the Lender may suspend the collection of Borrowing Base Certificates. Once suspended, the Lender must obtain a new BBC or complete a full credit memo documenting the current collateral position prior to making an advance. vi) 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. (a) 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. n) 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. Loans that are not In Margin are Past Due. If the Borrowing Base Certificate shows the Borrower is not In Margin or has not submitted a required BBC, the Lender must immediately require the Borrower to make a payment to reduce the loan balance to the point that it is within the borrowing base formula or obtain additional eligible collateral (i.e., marketable securities). The Lender must document their attempts to address the out-of-margin scenario in their credit file. No additional advances may be made against a line that is not In Margin until the line is brought back in balance unless the Lender receives SBA’s prior written consent through 7aLoanMod@sba.gov (regardless of whether the loan is processed on a non-delegated or PLP-WCP delegated basis). b. 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. i. If the Lender has the Borrower’s primary operating 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. a) If the Lender does not have the Borrower’s primary operating 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).