Beauty Store Business

SEP 2013

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The U.S. Small Business Administration historically was not a major player in providing guaranties for lines of credit. But a major policy revision in late 2011 changed all of that. In October 2011, the SBA instituted a new Working Capital CAPLine program, making it much easier for businesses to borrow against accounts receivable, inventory, contracts and purchase orders to fuel short-term seasonal needs and long-term growth. As a result, CAPLine volume more than tripled in fiscal 2012 (12 months ending September 30, 2012) to nearly $415 million nationally. And that number is expected to grow to more than $500 million in fiscal 2013. Lenders in all 50 states now participate in the CAPLine program. Karen Mills, former director of the SBA, explained the rationale behind the CAPLine program changes after visiting a small business in Memphis, Tennessee. "As businesses like this grow and find new customers, we need to do everything we can to make sure they have the working capital they need to scale up and create jobs," wrote Mills in a blog post in late 2011. "When a business lands a big order or wins a federal contract, [it often does not] have the necessary cash on hand to hire workers and buy materials to fulfill it. Now more than ever, we need to make sure a business in that position can secure the necessary financing to take full advantage of those opportunities." An SBA Working Capital CAPLine is a subprogram of the guaranteed loan platform found in section 7(a) of the SBA by-laws. A conventional bank—any bank can participate in the SBA-lending program—extends the line of credit to the beauty business with a 75% guaranty (85% for lines of $150,000 or less) from the SBA. This means that for a $1 million line, the most a bank could lose would be $250,000. However, because the lines are always secured by the assets of the business and also carry personal guaranties of the owner(s), the actual loss exposure is typically far lower. So, a $1 million line of credit (or a line of credit of any amount) that might normally be declined by the bank becomes acceptable based on the combined strength of the SBA's 75% credit enhancement, the assets of the business and the personal guaranty. The maximum amount of a Working Capital CAPLine is $5 million. There is no minimum. The line can be used for cyclical growth, short-term working capital, operating needs of the business and even refinancing other bank debt, in many cases. It cannot be used to refinance SBA guaranteed debt or to finance the purchase of or refinance of debt used for equipment, machinery, real estate or other fixed assets. The term of the line is negotiated between the borrower and the bank and can be up to 10 years. SBA Express Lines of Credit The SBA Express program also allows businesses to borrow from banks with an SBA guaranty for lines of credit—and term loans—up to $350,000. Besides the maximum loan amount, there are several notable differences between the Express and CAPLine programs: • The approval process for all SBA Express loans is streamlined for participating banks • The guaranty provided by the SBA is 50% for the Express program • Express lines under $100,000 can be done on an unsecured basis • There is no asset monitoring required for an Express line • Line-of-credit terms are generally shorter—up to 3 years—for an Express line • Maximum allowed pricing is higher for an Express line (the SBA fee structure is the same), particularly if the line amount is less than $50,000 When might the Express program make more sense than the CAPLine program? Banks often prefer the Express program due to the streamlined process. This means a quicker response for the bank and the business. Borrowers sometimes prefer the Express program because loans of less than $100,000 can be made with no collateral, and there is no asset monitoring requirement for any Express line. So, while the cost of financing generally is higher for Express than CAPLine, the Express program is more flexible with lower reporting requirements and is often preferred by both the bank and the borrower, particularly for lines of credit that are less than $100,000. How the CAPLine Program Works For the record, the SBA actually has four different CAPLine programs. The Contract, Seasonal and Builder CAPLine programs all address very specific needs in certain industries. However, the sole focus of this article will be on the SBA Working Capital CAPLine program. With a revolving structure, the line can be drawn up and down with proceeds used to purchase inventory or to fund new accounts receivable, contracts or purchase orders. The line is then paid down as inventory is sold and/ or accounts receivable and contracts are collected or purchase orders are converted to sales. The Working Capital CAPLine generally includes a borrowing 62 September 2013 | base certificate with a first lien against accounts receivable, inventory and other business assets and a limit of 1:1 coverage. Another way to state this is that the bank can lend up to 100% of the value of the assets of the business, which is far more favorable than most banks will lend for a conventional line of credit (70% to 85% on accounts receivable and 40% to 65% on inventory). Servicing and reporting requirements mirror those generally included with a conventional-monitored bank line of credit. The business must provide monthly agings of receivables and inventory and quarterly financial statements to the bank. The bank must conduct an annual credit review and perform regular site visits and field examinations. These field exams always include an inspection It's easier to borrow against receivables, inventory, contracts and purchase orders for shortterm needs and long-term growth.

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