Best Practices: Collateral Options for Working Capital CAPLines
By: Kimberlee Knopf, Esq.
|
Kimberlee Knopf, Esq. |
The new SBA Working Capital CAPline program offers lenders a powerful new tool to meet the working capital needs of their borrowers. However, it is critical that lenders understand the collateral requirements under this program to participate in a compliant manner. Pursuant to SOP 50 10 5(D), the collateral required for a Working Capital CAPLine is based upon whether or not Lenders are disbursing under the line through a borrowing base, or not.
If Lender intends to fund the CAPline based upon a borrowing base certificate (which certificate must be delivered by a Borrower monthly, or on a more frequent basis to conform to Lender's internal policy and procedures for similarly situated non-SBA borrowers), then the Lender is only required to obtain a first priority lien and security interest in borrower's working assets, namely, accounts receivable and inventory. The advantage to proceeding under a borrowing base is that fewer assets are required to be pledged as collateral for the loan; the disadvantage is that monitoring a borrowing base requires much more intensive monitoring on the part of the lender.
For various reasons, a Lender may not wish to disburse working capital funds through a borrowing base, and in such event, the Working Capital CAPLine is to be secured on a 1:1 collateral ratio based upon the maximum usage of the line of credit. Lenders must first analyze the working/trading assets of Borrower and if such assets are insufficient to meet the 1:1 test, then additional business assets and personal assets of the principals must be taken to fully collateralize the line of credit. If, after taking all available assets, lender is unable to achieve a 1:1 collateral ratio, the maximum amount of the Working Capital CAPline must be reduced to meet the 1:1 requirement.
SOP 50 10 5(D) has added further clarification with respect to determining the 1:1 collateral ratio for non-borrowing base Working Capital CAPlines. Unless otherwise indicated, business assets are to be discounted based upon the Net Book Value of such assets as listed on Borrower's financial statements. However, it is noted that this valuation method is inconsistent with the adequate collateral requirement in SOP 50 10 5(D) at p. 185 requiring lenders to value business operating and trading assets at not more than 10% of current book value due to such assets having a "negligible value in a liquidation." In any event, after determining the Net Book Value of the working capital assets, Lenders must then consider the Net Book Value of such assets as a percentage of the maximum line of credit. After subtracting ineligible receivables, Accounts Receivable must be less than or equal to 80% of the maximum line of credit while Inventory can not comprise more than 50% of the maximum line of credit.
If the working capital assets do not fully secure the Working Capital CAPLine, then Machinery and Equipment should be considered at either 50% of Net Book Value or 80% of Orderly Liquidation Value, less prior liens. A conservative approach when selecting between these options would be to utilize the lesser of the two values.
Lastly, Real Estate can be collateral for the Working Capital CAPLine using 80% of the value of such Real Estate, determined in accordance with Chapter 4, Paragraph II.C. of Subpart B. In the event Lender determines that the value of the Real Estate securing the line is in excess of its Net Book Value, then Lender must obtain an independent appraisal to support the higher valuation in accordance with Chapter 4, Paragraph II.C.3. of Subpart B. For more information about Collateral Options for Working Capital CAPLines, please contact Kim at [email protected] or 267-470-1188.
Back to top