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FINANCE COLUMN As we launch into 2014, the domes- tic waterfront continues to fi re on all pistons; boatbuilding, charter rates, uti- lization of tonnage, and so much more. That kind of momentum, however, re- quires funding to sustain. For smaller operators in need of capital to grow and/or maintain their fl eets, sourcing those funds can be tricky. Fortunately – and unlike the Department of Transportation’s Maritime Administration’s Title XI Federal Ship Financing Program of the last few years – the U.S. Small Business Administra- tion and the U.S. Department of Agriculture actually have the funding to make and guarantee loans for the U.S. com- mercial marine industry. That means that you have options – especially if you fi nd yourself in need of upgrading your fl eet due to environmental or subchapter M requirements. SOURCING FUNDS The SBA’s Certifi ed Development Company/504 Loan Program and the USDA’s Business and Industry Guaran- teed Loans are, for certain businesses, viable options for marine industry borrowers. Under the mandate to create jobs (at a stated rate of 1 new job per $65,000 in proceeds), grow small business and promote community develop- ment, these programs are well supported by current and prior administrations - with a FY 2014 budget of $949 million and $77 billion, respectively. Both have a healthy capacity for loans, loan guarantees and grants with a total of about $52 billion currently available. NUTS & BOLTS: SBA A CDC/504 loan fi nances fi xed assets for fi nancially healthy businesses, with a typical loan ranging between $200,000 and $5MM. While there is no stated maximum, a project can be in excess of $20MM with the portion above SBA’s $5MM fi nanced by the bank lender. The advance can be as high as 90% with a typical CDC/504 structure being comprised of 10% down payment by borrower, 50% in a guaranteed bank loan and 40% in an SBA CDC/504 loan. Start-up ventures, which are usually diffi cult to fi nance due to lack of historic fi nancial performance records, are fi nanceable through a CDC/504 loan. A start-up business should anticipate a lower advance rate of 85% or less in some cases, with personal guarantees required as well. While amortization periods vary based on the life of the asset fi nanced, the maximum amortization on the CDC/504 portion will probably not be longer than 20 years. The base index rate for the CDC/504 loan utilizes the 10-year Treasury Bill as published in the Federal Re- serve H.15 Selected Interest Rate report. Currently the rate is 2.74% (November 27, 2013). Spreads and fees, as appropriate to the credit, are also added to the base index. Fees and bond sale costs, including a CDC processing fee; the SBA guarantee fee; the funding corporate fee; and the bond broker fee add approximately 3.0% to the project cost. These fees and other soft costs like transportation, surveys, documentation fees, and closing costs are added to the CDC/504 loan portion and are fi nanced over 20 years. Prepayment penalties decline from 3.0% in year 1, to 0.30% in year 10, and 0% thereafter. CDC/504 loans are securitized and sold as bonds to insti- tutional investors like insurance companies, pension plans and mutual funds. To be considered for a CDC/504 loan an appli- cant must be “for profi t”; operate in the U.S.; have a tangible net worth of less than $15MM with an average net income of <$5MM after taxes for the last two years; be non-speculative or invest in rental real estate; be an “eligible” business using the proceeds for an “approved” purpose; not have funds available from other sources; be able to cash fl ow the debt from pro- jected operating income; be of “good” character; have relevant management experience and a feasible business plan. The application process requires the completion of the SBA Loan Application; Personal History Statement; Per- sonal Financial Statement; Business Financial Statements (including P&L and projections); ownership and affi liations statements; business certifi cates and licenses; loan applicant history; federal income tax returns for prior three years; business narrative; disclosure of leases or loans and other fi - nancials and collateral documents as might be required. USDA: PROMOTING QUALIFIED USE OF WATER RESOURCES The stated purpose of the USDA’s Business and Industry Guaranteed Loan program (B&I) is “to improve, develop, or fi nance business, industry and employment, and improve the economic and environmental climate in rural communi- ties.” It is not intended to guarantee marginal or substandard loans or “for relief of lenders having such loans.” Similar to the CDC/504 program, it is available to an existing or start- up business with the goals of providing jobs, improving the economic or environmental climate, promoting qualifi ed use of water resources and promoting renewable energy. Alphabet Soup The USSBA, USDA and USDOT’s Loan Programs By Richard J. Paine, Sr. January 2014 20 MN MN JAN14 Layout 18-31.indd 20 12/20/2013 10:05:08 AM
