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HomeMy WebLinkAboutAgenda - 09-15-1998 - 9aORANGE COUNTY BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT MEETING DATE: September 15, 1998 Action Agenda Item# 9 -a SUBJECT: Orange County Small Business Loan Program DEPARTMENT: EDC PUBLIC HEARING: Yes No_X_ BUDGET AMENDMENT NEEDED: Yes No X_ ATTACHMENT(S): Cover Memo from Greg Payne Revised Operating Policies Procedures Purpose: INFORMATION CONTACT: Margaret Cannell (ext.2325) and TELEPHONE NUMBERS: Hillsborough - 732 -8181 Durham - 688 -7331 Mebane - (336)227 -2031 Chapel Hill - 967 -9251/ 968 -4501 To approve suggested revisions to the Small Business Loan Program "Operating Policies and Procedures" document. Background: On May 15, 1998, a group of bank representatives (Chandler Burns of Centura, Jim Carter of CCB, and Earl Tye of BB &T) met with Commissioners Brown and Carey and County Manager John Link to examine the Operating Policies and Procedures document of the Orange County Small Business Loan Program. The bank representatives suggested revisions, as shown in the attached cover memo and revised document. The revisions were inserted into the document, produced in July 1998, marked by st-_'- __three hs for deletions and bold text for additions. At its August 27, 1998 meeting, the Economic Development Commission Board moved that the Operating Policies and Procedures document, as revised in July 1998, be recommended for review and approval by the Board of County Commissioners at its September 15, 1998 meeting. Once Operating Policies and Procedures are adopted members of the initial Board of Directors of the Orange County Small Business Loan Program Company can be determined and that corporation can be formed. 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 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 employee 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 loam 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 beAresidents of Orange County. fAv as Join *9 arelAe IF Length of residence in Orange County may be considered in assessing the 09§Sgnt'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. 4 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 %. MINA gees a selery t *nests mini f&Wm SWA&H& afthe See addition to Page 6, Loan Analysis. 9. 60ph-efflafty -m-MaM Play 60-SK 6-4-4—e IMM14 -M—AM &—r-6111 a-kmg12y2ft. See addition to Page 6. Loan Analysis. 9-7. 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. 4-Qv& A personal guarantee will be required of the owner(s) of the business. ELIGIBLE USES OF LOAN PROCEEDS 1. Working capital or operational funds. See change to Page 6 Procedures Item 4. 2. Purchase of equipment, commercial -use vehicles, or machinery. 3. Improvement of owner - occupied commercial property. (Owner must occupy 500/. 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`/0 of loan value.) 5 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) 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 REGUL ATIONS 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. 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. 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 may 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 for review. vmil- - 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. Those items shall include at least the following: 1. Business plan. 2. Employment plan (including proiected need for employees: skill levels and education required: emplgvee compensation, health insuranm and other benefits). 2:3. Business financial statements. (3 years plus interim) 3-4. Tax returns. (personal and business - 3 years) 45. Pro formas to determine if there will be sufficient cash flow to meet obligations for 2 yam• �6. Personal financial statements. 6-7. Information regarding collateral and a current credit report. -7-8. Other available financing including, but not limited to, whether other financial institutions have agreed to consider traditional debt financing and under what circumstances. S_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 301% of the aggregate loans made during the term of the program, less amounts paid from the reserve to the participating financial institutions. LOAN CON AI= io 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 fimding 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, detmrAnation 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. 2. The total of loan principal past due 30 days or more shall not for any month exceed 10% of outstanding loan commitments. Ii 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.