SBA SOP 50 10 8.1, B.Ch5.B.5 — Credit Standards for EWCP

d. Credit Analysis Lender’s credit analysis must include the following:

i. An explanation of the use of proceeds and benefits of the loan guaranty, including details of the underlying transaction(s) for which the loan is needed and the country(ies) where the buyer(s) is (are) located;

ii. The factors demonstrating the Applicant does not have credit available elsewhere on reasonable commercial terms from non-Federal, non-State, non-local government sources, in accordance with Section A, Ch. 1, Para. H, Credit not available elsewhere;

iii. A description of the nature of the business, length of time in business under current management and, if applicable, the depth of management experience in the industry or a related industry. Such analysis should include a brief description of the business’s management team;

iv. A discussion of the Applicant’s export experience and export business plan, which may include the following: a) Dollar amount of revenues that are or will be generated by export sales, and the percentage of total revenue; b) Principal or proposed export markets; c) Proposed or established export customer relationships; d) Largest export sales contract to date; e) Export contract backlog discussion; and f) Documentation of the Applicant’s performance history and ability to successfully complete obligations required by standby letter(s) of credit, which serve as bid, advanced payment, performance, supplier, and warranty guarantees and/or bonds.

v. A discussion of financing relationships to include a summary of all short and long term debt relationships, such as: a) Domestic revolving lines of credit or other term debt credit facilities, which includes a description of the purpose of the debt, payment structure and collateral; b) Standby debt. Address whether or not the standby debt will permit interest payments to be made and, if so, amounts and frequency, and under what conditions such payments can be halted; and c) Identify any SBA or other government-guaranteed financing.

vi. A financial analysis of the Applicant’s two most recent years of historical financial information (tax returns or balance sheet with debt schedule and income statement) plus an interim statement. The Lender should also provide an analysis of the Applicant’s financial projections for at least 12 months after the first disbursement. The analysis shall include: a) Analysis of historical cash flow and total debt service for the existing business; b) Calculation of operating cash flow (OCF) defined as earnings before interest, taxes, depreciation, and amortization (EBITDA); c) Analysis must document additions and subtractions to cash flow such as the following: i) Unfunded capital expenditures; ii) Non-recurring income; iii) Expenses and distributions; iv) Distributions for S-Corp taxes; v) Rent payments; vi) Owner’s Draw; and/or vii) Global cash flow analysis that includes assessment of impact on cash flow to/from any significant affiliate businesses.

vii. Debt service (DS) is defined as the future required principal and/or interest payments on all business debt inclusive of new SBA loan proceeds.

viii. For projected cash flows, the Lender should provide the calculation of debt service coverage using the definitions above, and provide analysis of the assumptions supporting the projected cash flow, such as: a) Reason for reduced expense structure, b) Reason for revenue growth, i.e., new product lines, sales channels, and new production facilities; and c) Industry analysis.

ix. A financial analysis of SBA EWCP loan repayment ability based on the Applicant’s cash cycle;

x. Field Examinations. a) The Lender must perform a field examination prior to the first disbursement on all Asset-Based EWCP loans that are $1,000,000 or greater. b) Lenders are not required to perform field examinations on Transaction-Based EWCP loans, as each transaction is reviewed individually by the institution. c) The field examination is an out-of-pocket expense and may be conducted by the Lender’s internal audit staff or a third-party examiner. An examination is a verification of the assets that compose the borrowing base. Examinations must include a sampling of the assets (receivables and inventory) included in the borrowing base. d) If the Asset-Based EWCP loan is $2,000,000 or greater, the Lender must conduct a field examination at least annually. e) For Asset-Based EWCP loans less than $2,000,000: After the initial field exam prior to the first disbursement (if applicable), the frequency of field examinations may be determined by the Lender based upon the quality of the records, risk profile of the Borrower and seasonality of the line. If the Lender determines that a field examination is not necessary as part of the annual review, the Lender must document the specific circumstances that enabled the decision. Acceptable criteria for not conducting an annual field examination for loans of less than $2,000,000 includes but is not limited to: overall line utilization, level of inventory reliance, suppressed availability, etc.

xi. For Asset-Based loans, a financial analysis of the collateral securing the EWCP loan that addresses any remarks or findings from the field examination.

xii. Ratio calculations for the following financial ratio benchmarks: Current Ratio, Debt/Tangible Net Worth, Debt Service Coverage, inventory turnover, receivables turnover, and payables turnover and any other ratios the Lender considers significant for the business/industry;

xiii. An analysis of the collateral that may include a discussion of: a) Buyer(s) and export destination market(s) risk, which may include economic, political, compliance, currency, or logistics; b) Anticipated “terms of sale” on the exports to be financed through the EWCP loan. Terms of sale may include: i) Cash before Shipment/Cash at Shipment; ii) Irrevocable Letters of Credit iii) Export Credit Insurance (for comprehensive commercial and political risk); iv) Collections (Cash against Documents); and v) Open Account; vi) Credit coverage, allowed sales terms, and the Borrower’s experience administering the policy. c) The composition and quality of the collateral in the proposed borrowing base that may include: i) Quality of the Borrower’s customer base; ii) The presence of concentrations risks; iii) Delinquency volumes and trends; and iv) Dilution.

xiv. A discussion of Lender’s credit experience with the Applicant and a review of business and personal credit reports.

xv. If the application involves a franchise (as defined by FTC), the Lender must review any credit information provided, such as the number of failed franchisees and cash flow projections provided by the franchisor). Lender must review any management agreement (unless the management agreement is part of the franchise disclosure documents for a brand listed on the Franchise Directory) to determine if it results in an ineligible passive company.