Fort Bragg Business Boost Fund
BUSINESS LOAN FUND PROGRAM GUIDELINES
October 3, 2024
I. PURPOSE
The primary purpose of the program is to provide financing to local businesses to improve and energize the economy and create new jobs by providing low interest flexible financing to businesses in the City of Fort Bragg. Loan funds can be used for short- or long-term working capital needs, purchasing equipment, purchasing real estate, acquiring an existing business, and refinancing debt. Program loans should not exceed $250,000.
The purpose of these guidelines is to provide the City Finance Committee and the City Council with a reference guide when considering the merits and viability of loan proposals. The loan proposals are prepared by Community Development Services, a team of experienced economic development and financing consultants working on behalf of the City of Fort Bragg.
II. INFORMATION FOR LENDING DECISIONS
The information summarized and evaluated in the Loan Proposal for each loan is based on documentation provided by the applicant with the loan application and from applicant interviews. This includes the applicant’s resume, financial statement, analysis of the market, management experience, sales strategy, two years month by month financial forecasts, personal credit report, past three years personal and business tax returns, business profit and loss statements and balance sheets, business and personal debt schedule, collateral for the loan, and the legal structure of the business. The purpose of gathering and analyzing this information is to provide the committee with enough information to determine if the business will generate adequate cash flow to service the debt for the term of the loan.
The committee considers the merits of the total loan and how the loan pieces fit together. That consideration is made up of five fundamental elements. These are, Character
The borrower’s reputation in the community and credit history are essential parts of the character test. A detailed credit report, compiled from Experian, Transunion, and Equifax information is obtained during the loan consideration process on the borrower and spouse. The report provides a credit score number rating the overall credit history, but more importantly provides an in-depth detailed history of the applicant’s credit history including current debts, past debts, liens, judgements, bankruptcies, and other related information. A credit score of 680 or more is desired. Character is a combination of honesty, integrity, responsibility, and financial management skills as measured by the applicant’s credit history.
Capacity
Capacity measures the borrower’s ability to repay the loan by comparing income against recurring debts and assessing the borrower’s debt to income ratio. This is where the past financial history of the business and the two-year forecasts are so important to determining what the debt service coverage ratio will be. The debt service ratio is defined as net operating income divided by total debt. If there is net income of $125,000 and the debt totals $100,000, then the debt service ratio is 1.25. And 1.25 or better is the target debt service ratio. Capacity also includes the applicant’s ability by way of education and experience, to run the business successfully. An element of capacity also includes the personal financial status of the borrower which includes an understanding of their personal budget and business draw needs to meet their budget requirements.
Capital
All lenders want to see that the applicant is putting some equity, preferably cash, into the business loan project. The goal is for the applicant to bring 20% of the total project from their resources. This goal is often difficult to meet, so we look for other ways the applicant is contributing to the total project. The more the borrower has committed to the project, the more likely the loan will be paid back.
Collateral
Lending is inherently risky. Therefore, we need to have collateral in case the borrower does not repay the loan. Collateral can be equipment or inventory, but the best collateral is unencumbered land, valued at more than the loan amount, held in first deed position by the city. When considering a loan, we look at the net worth to asset ratio derived from the both the business balance sheet and personal financial statement and the availability of real estate to determine if we will have adequate collateral. The willingness of the borrower to provide collateral is also a means to determine their commitment to repaying the loan.
Conditions
Business and economic conditions include general market/economic conditions, the size of the loan, the internal condition of the business, the structure of the loan itself, the use of the loan funds, and other concerns which come up during the loan underwriting process.
Loan Evaluation Matrix
To provide the committee with a tool to evaluate a loan proposal utilizing the five fundamental measurement considerations of business lending, the following chart is provided within each loan proposal.
Measurement Fair Good Very Good Excellent Credit Scores
Credit History
Personal Financial Status
Company Net Worth
Net Worth to Asset Ratio
Debt Service Coverage Ratio
Capital Injection
Collateral
Conditions
Recommendation
III. PUBLIC BENEFIT & NEED FOR FUNDS
To determine whether city program funds are necessary, a gap must exist in the amount of existing capital available from the business or from conventional loan sources to meet the total project needs. A financial gap can include both the availability, and the cost of capital needed by the business. For example, a business may need $150,000 to cover expansion costs but only have $100,000 available, leaving a gap of $50,000. Also, if the cost of financing may stop the project from proceeding, financing costs may be decreased by reducing the interest rate, deferring principal payments, and/or extending the loan term based on an analysis of business debt service capacity, project needs, and a review of a reasonable return on investment to the owner.
In addition to demonstrating financial need, each project should also demonstrate that it meets the overall goal of improving the economy of the city.
PROGRAM PARAMETERS
The interest rate and length of the loans are determined within a range of favorable terms based on security and purpose of the loan, as described below.
Up to 1% in loan origination fees can be charged for loans.
Loans are neither assumable nor assignable.
In companion loans, positions may be taken behind senior liens when the amount provided by the participating bank exceeds the program loan amount.
The borrower must demonstrate the ability to repay the loan from the operation of the business.
Loan interest rates will range between 2%-5%.
Interest Rates
All interest rates are fixed rates and are priced off the Prime Rate as quoted in the Wall Street Journal (Western Edition). This rate is 8.0% as of October 3,2024. Interest rates are initially based on whether a loan is unsecured or secured. After preliminary debt service payments are calculated, the interest rate may be modified by considering the debt service capacity of the business, the collateral position of the city, the company net worth, and personal financial status of the borrower. In general, the higher the risk, the higher the interest rate.
Unsecured Loans. The Prime Rate less 3.0% is initially recommended for all types of unsecured loans. Most loans provided under the IRP programs are for working capital, equipment, and/or inventory. Therefore, they are unsecured loans (even though they may be secured by UCC-1 filings and security agreements covering all eligible business assets). It is important to remember that the city should only consider loans of this nature when all other elements of the loan are very good to excellent. The two reasons for classifying these loans as unsecured are as follows:
During the loan term, the borrower has control of these business assets, and these assets may not be available to liquidate the loan if the business fails.
The city loan may be in a junior lien position behind a bank, vendor, leasing company, or other lender.
Secured Loans. The Prime Rate plus 6% is initially recommended for secured loans. In the case of loans secured by real estate the value of the collateral is dependent on the equity in the property at the time of liquidation. Therefore, for purposes of pricing, the value of the collateral is analyzed based on the following criteria:
Lien position
Property equity
Appraised value
Environmental issues
Debt Service Coverage Ratio
Zoning requirements
For loans secured by real estate, a collateral analysis is completed to determine if the equity is sufficient to qualify the loan as secured. If the value of the real estate is less than 125% of the loan amount, the loan is classified as unsecured, and a higher interest rate is applied.
Length of the Loan
The length of the loan is based on its purpose. Loan funds are available for the following purposes: working capital and purchase of inventory, equipment, or real property. City loans can be made for construction purposes as well.
Working Capital. Loans for working capital should not exceed 5 years. Business cash flow should be adequate to service a loan for this purpose in 5 years or less.
Inventory. Loans for the purchase of inventory should not exceed 5 years. The borrower should be cautioned that future purchases of inventory should be made from business cash flow based on the average turnover rate for the specific business type. An exception may be considered for business expansion purposes.
Equipment. Loans for the purchase of equipment may be considered for up to 10 years, depending on the useful life of the equipment. The loan term should not exceed the term of depreciation reflected in the tax return schedule. If the equipment is the only collateral securing the loan, the borrower should be required to put a 20% down payment on the purchase price.
Real Estate. Loans for the purchase of real property should not exceed 20 years and should be fully amortized. Age and condition of the property are to be considered.
V. LOAN APPLICATION PROCESSING AND CLOSING
The City contracts with Community Development Services (CDS), program. CDS works with local organizations and institutions to implement this program. The other essential group in this program is the Loan Committee. The Loan Committee is comprised of city staff, local commercial and consumer lenders who review the loan proposals and make recommendation to modify and approve the loan proposals. Specific roles and responsibilities for each phase of the program are described below.
Marketing and Outreach
CDS, participating banks, and city staff will market the program at local business functions, with periodic flyers, presentations at evening workshops and in one-on-one consultations. Loan referrals are made primarily from local banks, business, and city staff.
Screening Potential Applicants
CDS and bank staff screen for appropriate loan clients. The ultimate decision regarding appropriateness for further consideration is made by CDS. These determinations are reported to city staff during the underwriting process for their consideration.
Application Intake
The loan process begins by CDS requesting applicants to provide the following:
Completed loan application form, identifying the amount of the loan requested and a description of the intended use of loan funds and other sources of funding.
Financial statements of the business covering the last three years.
Interim financial statement of the business from the start of the current fiscal year to the most recent date available.
Realistic and reasonable business activity forecasts, cash flow projections, income and expense projections, and collateral value.
Most recent personal financial statements of all owners or participants with a 20% or more interest in the business.
Brief resumes of key management personnel and owners.
Credit verification. Tax liens or charge-offs may invalidate an application.
Business plan, if determined necessary.
Release to obtain credit report.
Application Review Criteria
CDS provides the applicant with an indication of loan feasibility after a consultation and review of the preliminary loan application; the review each application based on the following criteria:
Appropriateness of providing program funds to the project (reasonableness of project costs, existence of financial gap, etc.).
Financial feasibility based on the loan evaluation matrix criteria.
History of profitable operations, with a preference for expanding businesses which have been in business for over three years.
Business activity forecasts, cash flow projections, income and expense projections, value of collateral.
Experience of key management and owners.
CDS staff analyzes each application using several financial management ratios. The cash flow coverage is the primary consideration in the approval process. The other ratios listed below are also used as measurements:
Cash flow coverage of 125% of debt service is used as a guideline.
Current ratio (which is current assets to current liabilities) of 2:1 is considered secure.
Quick ratio (cash and equivalents plus accounts and notes receivable to current liabilities) of 1:1 usually indicates ample liquidity.
Debt to worth ratio (total liabilities to tangible net worth) ratio of 5:1 as the extreme high end.
Collateral coverage of 125% of loan balance is considered standard.
Break even analysis of the project’s ability to support the projected labor costs and additional debt service.
Loan Committee Review
If appropriate, the loan request is then prepared in loan proposal format, in concurrence with bank staff, when applicable, and presented to the Loan Committee. The Loan Committee reviews the loan proposal and determines whether to 1) approve the loan as recommended, 2) modify the terms and conditions of the proposed loan, 3) or deny the loan. The Loan Committee will meet to review and either approve or deny loan requests as needed.
Loan Conditions
Program funds are loaned only to businesses located in the City of Fort Bragg.
Any business wishing to receive a loan through the program is required to comply with all applicable City permit requirements and CEQA or NEPA requirements.
Any business receiving a loan under this program shall not unlawfully discriminate against any individual seeking employment or already employed because of sex, race, color, ancestry, religious creed, national origin, physical disability (including HIV and AIDS), medical condition (cancer), age, marital status or any other arbitrary basis.
If at any time during the term of the loan, it is discovered that a business is willfully out of compliance with any of these conditions, the City may require payment of any outstanding loan balances within ninety (90) days of the discovery of non-compliance.
A business shall not be eligible for a second business loan until the first loan has been substantially reduced and the applicant has a history of timely loan payments.
All loan information is maintained as strictly confidential.
Loans shall become due and payable if the business receiving the loan moves from the City. Arrangements will be made on a case-by-case basis.
Closing Procedures
Each loan is appropriately and thoroughly closed by following the checklist below:
Reviews borrowers debts and liabilities.
Verifies asset ownership and proof of insurance.
Requires personal references, when appropriate.
Ensures borrower signs the loan agreement, including non-financial employment plan.
Ensures borrower signs a promissory note that cites the amount, interest rate, and repayment schedule for the loan.
Collects required security agreements for collateral.
Collects personal guaranty (when appropriate).
Collects corporate guaranty (when appropriate).
Ensures subordination agreement is signed (when appropriate).
Ensures lien is recorded on mortgage (when appropriate).
Collects life insurance policy and assignment (when appropriate).
Collects other documents as determined appropriate.
VI. LOAN SERVICING
Sharing Risk
One objective of the program is to share risk up front with local banks on a project-by-project basis. This is an important part of the overall program design. Bank participation in determining if a loan is feasible and collaboration in applying the appropriate test to each loan assures that loan funds are utilized with a minimum of risk and in a way that fits the economic development goals of the city. Of equal importance is each bank's financial participation in each loan to leverage program funds, share expertise, and collaborate for the overall community good.
Monitoring Changes in Credit Risk
The credit risk of each loan changes over time. To spot deterioration or potential problems early, before cash or time limits options, regular financial reporting from borrowers is required. City will stay in touch with each borrower monthly to help with early detection of problems and provide for the provision of remedial action whenever necessary. Frequent contact with loan customers is an essential component of each loan.
Disciplined Collection
A clearly defined collection policy communicated to the client underscores that defaults will not be tolerated. This information will be supported by prompt collection action and pursuit of repayment. When necessary, the procedures for handling delinquent loans, including remedies to the point of foreclosure, will follow the procedures outlined in the Problem Loans Administration section.
VII. APPEALS
Upon written request, applicants may appeal decisions made by the Loan Committee. Appeals shall only be considered where there exists a legitimate interpretation issue over the program guidelines, or it is unclear whether the spirit and intent of these guidelines cover a given applicant's business circumstance. 1