HomeMy WebLinkAboutAgenda - 10-06-1998 - 8dORANGE COUNTY
BOARD OF COMMISSIONERS
ACTION AGENDA ITEM ABSTRACT
MEETING DATE: October 6,1998
Action Agenda
Item # S �J
SUBJECT: Orange County Small Business Loan Program
DEPARTMENT: EDC PUBLIC HEARING: Yes No _X_
BUDGET AMENDMENT NEEDED: Yes No X
ATTACHMENT(S): INFORMATION CONTACT:
Revised Operating Policies and Margaret Cannell (ext. 2325)
Procedures document
TELEPHONE
NUMBERS:
Hillsborough -
732 -8181
Durham -
688 -7331
Mebane -
(336) 227 -2031
Chapel Hill -
967 - 9251/968 -4501
Purpose:
To approve the revised Small Business Loan Program "Operating Policies and
Procedures"
Background:
At its September 15, 1998 meeting, the Board of County Commissioners approved the
Operating Policies and Procedures document of the Small Business Loan Program, with
revisions. Submitted for approval at the BOCC's October 6th meeting is the document
with revisions completed, as noted below:
Under "Commitment Period" (document page 1) — Bold text denotes that the
loan program will be reviewed after three years.
Under "Procedures," paragraph 5 (document page 6) — language added regarding
reports to BOCC.
Under "Loan Analysis," opening paragraph (document page 6) — language added
to address concerns by BOCC that the Loan Committee look at employer's plan
for wages, health insurance, term of residency, etc.
Recommendation:
The Manager recommends that the Commissioners approve the Operating Policies and
Procedures document with revisions as noted.
ORANGE COUNTY
SMALL BUSINESS LOAN PROGRAM
Operating Policies and Procedures
July 1998
ORANGE COUNTY SMALL BUSINESS LOAN PROGRAM
PURPOSE
The purpose of this program is to stimulate the creation of good jobs for Orange County citizens
as well as to stimulate successful business development and expansion in Orange County. The
program will attempt to assist businesses that have limited access to financing through
conventional means or other government guaranteed sponsored programs. Businesses receiving
funding through this program are strongly encouraged to be good corporate citizens as defined in
Orange County's Economic Development Strategic Plan. Businesses are also encouraged to
employ Orange County citizens.
AMOUNT
Initial 3 -year loan capacity of up to $500,000, funded by commitments from local financial
institutions.
COMMITMENT PERIOD
Three years from the date of execution of the master loan agreement. After three (3) years,
the loan program will be reviewed by the Board of County Commissioners and
participating financial institutions to determine whether to continue the program.
ELIGIBILITY
1. All applicants must be residents of Orange County. Length of residence in Orange
County may be considered in assessing the applicant's degree of commitment to the
community.
2. Businesses must be located within Orange County in areas zoned appropriately for their
use.
3. At the discretion of the Loan Committee, applicants may be required to participate in the
NC Small Business & Technology Development Center (SBTDC) technical assistance
program.
4. Applicants must be a for -profit business entity whose gross revenues do not exceed $3
million.
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5. Applicants must be willing to contract for management and technical assistance if
determined to be necessary by the Loan Committee.
6. Applicants must have an equity contribution in a start-up business of at least 15 %.
7. Individuals with an ownership position of 10% or more of the outstanding shares of stock
of the business will be required to execute an Unconditional Guaranty Agreement for the
full amount of the loan.
8. A personal guarantee will be required of the owner(s) of the business.
ELIGIBLE USES OF LOAN PROCEEDS
1. Working capital or operational funds.
2. Purchase of equipment, commercial -use vehicles, or machinery.
3. Improvement of owner - occupied commercial property. (Owner must occupy 50% or
more of total space.)
4. Start-up funding.
S. Expansion of business services or products.
6. Acquisition of owner - occupied commercial real estate (7 -year maturation).
7. Tenant upfit and lease -hold improvements.
8. A small business loan request that is to be used in conjunction with other financing
vehicles will be considered on a case -by -case basis.
LOAN PROCEEDS SHALL NOT BE USED FOR THE FOLLOWING
1. Refinancing of existing bank debt or investor loans. (Refer to exception in Collateral
section. The loan committee may grant an exception of up to 50% of loan value.) .
2. Purchase of equipment or improvement of real estate which is used as personal property.
3. Political activities.
4. Owner salary and dividend payments beyond an agreed amount.
5. Speculative ventures (Examples; drilling for gas or oil, commodity futures)
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6. Lending or investment.
7. Real property held for sale or investment.
8. Pyramid sales - distribution plan businesses.
9. Floor plan financing.
10. Individuals with pending criminal charges or who are incarcerated, on probation, or
parole.
11. Foreign controlled businesses.
12. Non -profit institutions.
13. Private membership clubs.
COMPLIANCE WITH APPLICABLE REGULATIONS
In all cases, loans made from this program must be consistent and in accordance with the
following:
1. All state and local regulations governing the applicant's line of business.
2. Policies established by the Loan Committee for each particular applicant.
3. Policies established by the Board of County Commissioners dealing with this loan
program-
AMOUNT OF LOANS
Maximum: $50,000. Minimum: $5,000. Should market conditions change, or in the event of an
applicant with extra - ordinary conditions, an alternative loan may be considered. All loans are
subject to availability.
LOAN TERM
Maximum Term - 5 years (except 7 years for real estate)
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INTEREST RATE
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All loans will accrue interest on a daily basis at a floating interest rate. Interest rates will be
quoted based on the Wall Street Prime Rate plus a spread based on the maturity of the loan:
0-2 years Prime plus 2.00%
2 -3 years Prime plus 2.25%
3-4 years Prime plus 2.50%
4-5 years Prime plus 3.00%
Regarding term loans, Borrower will have option to pay interest at the floating accrual rate, or a
fixed payment rate based on the following schedule:
• One to three year maturity - accrual rate quoted at the origination date of loan +1 %
• Three to four year maturity - accrual rate quoted at the origination date of loan +1 1/2%
• Four to five year maturity - accrual rate quoted at the origination date of loan +2%
The loan committee may consider amount of loan, term, and collateral in making adjustments in
the rate that they deem appropriate. The loan committee will review the payment rate at least
annually in order to avoid negative amortization.
FEES AND EXPENSES
An origination fee will be charged, payable at closing, ranging from 1% to 1 1/2°/., but, in no
case to exceed limits set by North Carolina Statutes and can be financed in the loan. The
minimum origination fee will be $100. The applicant will be responsible for all other expenses
related to closing the loan, including, but not limited to, recording fees and legal fees. The
applicant will also be responsible for any fees related to any appraisals or reports required by the
Loan Committee.
LOAN REPAYMENT
Loan repayments shall be due on the first day of the month. A late payment will be assessed at
2% of the payment amount after the loan becomes 15 days overdue. Loans may be prepaid
without penalty. In the event the loan payment becomes 30 days overdue, the Loan Committee
will establish and implement the Procedures for the Collection of Delinquent Loans. These
procedures will be developed by the Loan Committee and will be presented to the Board of
County Commissioners for approval .
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COLLATERAL
Loans shall be secured by appropriate forms of collateral, with recorded first lien positions as
appropriate. Acceptable forms of collateral will be based on commonly accepted definitions
(fixed assets, inventory, accounts receivable, land, building, equipment, or personal assets).
Advance rates should be limited to the following percentages: Inventory - 50 %; accounts
receivable - 70% on accounts less than 90 days in age; unimproved real estate - 50 %;
commercial real estate - owner - occupied maximum 80% LTV, or 85% LTV on personal real
estate; new equipment - W /., and used equipment - 60 %.
SUGGESTED LOAN GUIDELINES
1. Creditworthiness - Although applicants will be considered with credit ratings showing a
history of accounts up to 30 days past due, preference will be given to borrowers with
good credit ratings. Applicants with bankruptcy or repossessions listed on their credit
report will, in most cases, be considered too great a credit risk for this program.
2. Cash Flow Coverage - The loan program is targeted to applicants with a cash flow
coverage, prior to new debt, (as hereafter defined) of not less than 1.1 to 1 to current
maturities of long -term debt. Cash Flow is further defined as net income plus
depreciation.
3. Debt To Worth - The loan program is targeted to applicants whose total debt does not
exceed net worth by 3 to 1.
LOAN PROGRAM ADMINISTRATION
Administration of this loan program shall initially be performed by the Orange County Economic
Development Commission. An outside vendor acceptable to the financial institutions and the
County will be utilized to underwrite and service these loans, to include billing and generating
administrative reports.
PROCEDURES
1. Applicants will be referred to the Orange County Economic Development Commission
who will meet with them and process applications. This process will utilize the services
of the NC Small Business & Technology Development Center.
2. Completed applications will be submitted to the Loan Committee no later than two weeks
prior to its next scheduled meeting. The Loan Committee will normally meet once
monthly.
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3. At the monthly meeting, the Loan Committee will decide whether or not to take action on
the request, based on the information provided. The applicant will be informed in writing
of the Loan Committee's decision. Should the Loan Committee deny the applicant's
application, the Loan Committee will not consider any applications from that applicant
for at least six months.
4. At its discretion, the Loan Committee may impose any additional terms and conditions
necessary to improve the loan or to secure the applicant's loan. The Loan Committee shall
require an itemized budget detailing the proposed use of loan funds.
5. After Loan Committee approval, applications will be presented to the Board of County
Commissioners as a report at the next regular Board of County Commissioners' meeting.
In addition, any default or loan loss will be reported immediately at the next Board of
County Commissioners' meeting.
6. Should the applicant feel that his/her application has been improperly denied, then he/she
should notify, in writing, the Chair of the Loan Committee of his/her position. Denial of
the application shall then be reviewed by the Loan Committee for further consideration.
LOAN ANALYSIS
The Loan Committee shall review and consider a number of items in determining whether a loan
should be made. The Loan Committee will consider the applicant's length of residence in
Orange County, the applicant's effort to provide a living wage to employees, the applicant's
contribution to health benefits for all employees, and the proportion of loan proceeds to be used
for working capital or operational funds. Other specific items shall include at least the following:
I . Business plan.
2. Employment plan (including projected need for employees; skill levels and education
required; employee compensation, health insurance, and other benefits).
3. Business financial statements. (3 years plus interim)
4. Tax returns. (personal and business - 3 years)
5. Pro formas to determine if there will be sufficient cash flow to meet obligations for 2
yem-
6. Personal financial statements.
7. Information regarding collateral and a current credit report .
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8. Other available financing including, but not limited to, whether other financial
institutions have agreed to consider traditional debt financing and under what
circumstances.
9. Should the Loan Committee determine that it needs additional information before
granting or denying the application, the Program Administrator will notify the applicant
of the information needed.
PROPOSED STRUCTURE
Each bank participant will commit a revolving credit line on a non - recourse basis to an entity
determined by appropriate legal review of the proposed structure. These credit lines will be
secured by assignment of the loan receivables to such entity. A 36 -month commitment period
will be established during which time each financial institution will fund approved loans on a
pro -rata basis. Funding procedures, to include a provision for an appropriate notice mechanism,
would be established. At the end of the commitment period, to the extent there are amounts
owned under the loan program, the amounts owed would be "termed" for a period of no later
than the latest scheduled maturity date for loans outstanding to Borrowers under the program.
The County will provide an irrevocable commitment to fund a loan loss reserve equal to 30% of
the financial institutions' commitment. All financial institution participants will bear their share
of any losses (70% of principal, interest, collection fees, etc.) incurred under the program.
Collection procedures and loss procedures will be established. Repayment of the financial
institutions' loans will be on a monthly basis and will consist of the net proceeds received from
Borrowers under the program. The established entity will pay each financial institution its
percentage share of those net proceeds on a monthly basis.
This proposed structure may be subject to modification based upon the review and advice of
appropriate counsel.
LOAN LOSS RESERVE
• In the first year a Loan Loss Reserve of $50,000 (30 %) must be 100% irrevocably
committed by Orange County prior to implementation or activation of the Orange County
Loan Program. In year two, an additional $50,000 must be committed. In year three,
$50,000 must be committed, bringing the County total to 30% of the one -half million
dollar loan capacity.
• Loan Loss Reserve to be provided by Orange County shall be funded in an amount not
less than 30% of the aggregate loans made during the term of the program, less amounts
paid from the reserve to the participating financial institutions.
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LOAN COMMITTEE
Membership shall consist of 6 representatives from the participating financial institutions and 3
representatives appointed by the County Commissioners. Selection of the 6 initial financial
institution members shall be made by the members of the Loan Pool Task Force, with no less
than 4 members of this initial selection representing financial institutions serving on the Task
Force. The 3 representatives appointed by the County Commissioners will be the County
Manager, County Finance Director, and a County Commissioner. Financial institution
appointees will serve staggered three -year terms established by the Task Force in order to
provide for future rotation of 3 members each year. Future membership selection from the
participating financial institutions will be determined by a majority vote of the sitting members
of the Loan Committee, such election to occur annually during the month of June. Meetings will
be presided over by a Chair, who will be elected by the Committee each June. It will be the
responsibility of the Chair to assure a quorum is present (5 members or more at each Loan
Committee meeting); to generally monitor the duties of the Loan Program administration; to
make sure loan proposal packages are properly prepared prior to their presentation at Loan
Committee meetings; and to oversee the preparation of commitment letters to approved
borrowers. Such commitment letters will be signed by the Chair, with a duplicate signed copy
provided to the County as part of their notice for funding the Loan Loss Reserve. The Loan
Committee will have the following responsibilities:
1. Find creative ways to utilize loanable funds to stimulate successful small business
development and job creation.
2. Meet monthly to review loan applications and determine which request will be approved
and under what terms and conditions.
3. Periodically review status of existing loans and recommend appropriate corrective action
or special monitoring where needed.
4. Approve modifications to loan agreements.
5. Evaluate underwriting requirements and make appropriate adjustments as needed to
accomplish the objectives of the program.
6. Provide direction regarding collection (e.g. legal action, foreclosure, acceleration of
amortization, determination of default/charge -off, etc.)
7. Conduct annual review of loan documents and credit files.
PORTFOLIO MANAGEMENT GUIDELINES
1. Loans to start-up businesses shall not exceed 25% of the loan pool .
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2. The total of loan principal past due 30 days or more shall not for any month exceed 10%
of outstanding loan commitments.
Any exception to the above will result in a moratorium on future loan requests and a review of
these loan guidelines by the Loan Committee.
SPREAD ALLOCATION
During the first three years of operation, financial institutions will fund commitments at the
Prime rate in order to provide sufficient spread to substantially defray administrative and
servicing costs, plus provide a source to gradually replace the loan loss reserve established by the
County. Annually, this entire issue will be reviewed and adjustments made as necessary .
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