sbaSTRATEGIES Newsletter

More Changes in the SBA Process

2011-12-21T15:35:00.001-06:00

SBA has implemented a 10-Tab format for the application process. Effective November 2011 SBA is requesting Lenders and Packager to submit electronic applications using the new 10-Tab format. When organizing your files in a similar fashion it will also make for a quick conversion to the 10-Tab system for a Guaranty Purchase Request too.

sbaSTRATEGIES can help make the process even easier for you. We will package the loan for you, increasing your chances of a quick-turn around and approval of your SBA application. sbaSTRATEGIES has the expertise and tools necessary to make the process enjoyable.

SBA also has a new Eligibility Checklist to include the SOP changes that became effective October 1, 2011.

For non-delegated lenders, SBA now has a new process for requesting changes to the SBA Authorization post approval. All modification requests through the time of final disbursement should be e-mailed to 7aLoanMod@sba.gov; request must include the name of the lender, name of lending officer, phone number, fax number, name of borrower, SBA Loan number and the change requested. Then change request should include the current requirement, what it would be changed to and reason for change. Include and supporting documentation necessary. After final disbursement, modification requests must be sent to the appropriate CLSC.

Planning for the New Year - 2012

2011-12-21T15:34:00.001-06:00

December is a time to reflect on the past year, to plan and decide how to better ourselves and our business in the upcoming year.

Many lenders are reviewing their numbers and goals from the present year to see how close they have come to meeting them. It is also an excellent time to review current processes and procedures and find ways improve efficiencies. Remember the age-old adage, working smarter, not harder. If you master the concept, your working life will be easier.

Before you plunge into the New Year headfirst, remember that enthusiasm needs to be tempered with wisdom. Look over every aspect of your goals and what affect your current processes and procedures have on them. Assess what is working and what is not, what can be improved in order to save time and increase the quality of your portfolio. Make sure your team is well-ordered and that the skill level meets the task assigned. Being proactive means thinking and acting ahead, using foresight. It's a great method for avoiding more work down the road but also can be extremely important for averting disasters, planning well for the future and for implementing systems that make life easier for not just you, but others as well.

In the New Year we encourage you to set goals for participating in the SBA Program and for improving work efficiencies. We would be happy to assist you by looking at your current processes and procedures, show you ways to become more profitable and increase efficiencies. We also recommend that you conduct file reviews on some of your loan files to determine if there are file deficiencies that should be addressed. sbaSTRATEGIES uses the same review process that SBA uses when conducting lender reviews so you will receive valuable feedback that can be used as a training tool.

Another important tool to building a strong lending team is training. Training builds confidence among your team and helps them become more successful. We can provide in-depth training to your lenders and support staff on how to identify SBA loan opportunities, processing, closing and servicing SBA loans. We can customize a training program to meet your specific needs.

Make sbaSTRATEGIES your one stop SBA resource in 2012. Whatever your needs are we are here as your partner in lending. We are happy to share our expertise, experiences and proven processes that we have learned over our many years in the industry. Call us to set up a complementary initial assessment to get you off on the right foot for the New Year.

Revised SBA Forms - Eff. November 2011

2011-11-16T14:50:00.000-06:00

SBA has implemented a 10 Tab system for new 7a loan applications. CLICK HERE to get the tabs, revised checklist and instructions.

SBA has updated the SBA Eligibility Checklist, CLICK HERE to get the updated form.

If this process is something you don't want to handles, contact us and we'll do it for you.

Phone 320-529-8185 or kimberly@sbastrategies.com

Properly Documenting SBA Loan Disbursements

2011-11-07T10:10:00.000-06:00

Failure to properly document loan disbursements is one of the top reasons for a repair or denial of the SBA guaranty. I have seen it time and time again where small community lenders deposit loan funds into a borrower’s account for them to purchase equipment or inventory, not ever knowing if the proceeds actually went for their intended use. Though this may be acceptable on a conventional loan for a borrower that has a close relationship with their lender, this type of disbursing is not acceptable under the SBA loan program. It is important to prove that loan proceeds were indeed used for an eligible loan purpose.

The first step the lender must do is make sure the use of proceeds outlined in the SBA Authorization is correct. If not, follow the proper steps to modify the use of proceeds.

Second, have the discussion with your borrower early in the process that all disbursements must be facilitated through you the lender. Ask they do not pay invoices themselves and submit for reimbursement, rather submit invoice to the bank to pay directly. If they are a start-up business, I strongly suggest they set-up their business account early and deposit funds to draw on. I do not recommend they use their personal banking accounts for business purposes, this blurs the lines between items being a business or personal use. SBA has a strict policy that loan proceeds cannot be used to pay associates of the borrower, this includes reimbursement of expenses intended for the loan. If reimbursement is necessary, be sure to document your file with evidence that payment was been satisfied with the third party, either by a cancelled check, wire confirmation or paid receipt.

Third, if multiple categories or disbursements are involved, create a spreadsheet to properly track the use of proceeds by category. This will help you monitor compliance with the use of proceeds as outlined in your SBA Authorization.

Last, organize the disbursements with a copy of the bank check, wire transfer confirmation and a copy of the invoice.

When documenting construction loan disbursements, it is important to have a sworn construction statement to monitor they are on track with progress as compared to payments. Also, it is important to monitor lien waivers to insure all contractors and sub-contractors are being paid as agreed. A sworn construction statement will also help monitor change orders and cost over-runs, this will also allow you time to address how those will be covered.

When documenting proceeds to payoff credit cards, it is important that the lender document the credit card balance was used for business related purposes and obtain a statement from borrower certifying that amounts were exclusively used for business purposes.

Furthermore, I would like to mention that an Eligible Passive Company is never allowed to receive working capital funds. So in the case whereas an EPC and OC are co-borrowers, make sure your documentation is very clear that any excess funds or working capital disbursed was paid directly to the operating company for their sole use. We recently had a situation where the title company only listed the EPC on the HUD and showed excess funds were disbursed to the borrower. This documentation oversite almost resulted in a repair of the loan guaranty, however we were able to provide evidence that a check for those excess funds were made payable to the operating company and not the EPC, thereby saving the guaranty from a repair.

Lenders may disburse to borrower as working capital only, funds not spent for the listed purpose as long as those funds do not exceed 10% or $10,000, whichever is less.

New SOP 50 10 5(D) - Effective 10/01/11

2011-10-05T15:26:00.001-05:00

Mid-September SBA issued a notice and a copy of the lasted version of the SOP 50 10 5, version (D) became effective 10/1/2011. This effective date correlates with the start of a new SBA fiscal year. While some changes are minor, others are quite significant.

A few of the most significant changes effect the SBA CAPline Program, Franchise Review, the addition of the Small Loan Advantage (SLA) Program, and Export Express Program. Minor changes include loans to finance a Change in Ownership, Debt Refinance, Interest Rate Adjustments, Use of Lender Service Providers and Environmental Investigations of Gas Stations. Areas of added clarification include, Prior Loss to Government, Default on Government Debt, Accrual Methods, Allowable Fees, SBA Form 159 (Compensation Agreement), Business Valuations, Life Insurance, and Modifying the Loan Authorization.

To easily view these changes in more detail, SBA has provided a marked up copy on their website, along with a final copy. CLICK HERE to view/print a copy.

This month I have extracted a few areas from the SOP that effect our local lenders most often.

Change in Ownership: (Pg. 138)

H. Change of Ownership (13 CFR 120.202)

1. A Small Business Applicant may use loan proceeds for a change of ownership in the following circumstances:

a) The Small Business Applicant is purchasing 100% of the ownership interest in a business (either an asset purchase, transfer of a partnership interest or a redemption of stock); or

b) The Small Business Applicant is acquiring 100% of the ownership interest of one or more exiting owners. When a change of ownership is between existing owners, this must be accomplished through redemption of stock by the corporation or through the purchase of a partner’s interest by the partnership. A partner, shareholder, or an unrelated third party may not use SBA-guaranteed loan proceeds to purchase an existing owner’s interest in the business.

Appraisal and Business Valuation Requirements:

(Pg. 189)

i) An appraisal may be submitted as part of the loan application to assist with the underwriting or as part of the loan closing. In no case may the lender rely on an appraisal that was prepared more than 12 months prior to the date of the application.

… (Pg. 191)

d) In order for the individual performing the business valuation to identify the scope of work appropriately, the business valuation must be requested by and prepared for the lender. The scope of work should identify whether the transaction is an asset purchase or stock purchase and be specific enough for the individual performing the business valuation to know what is included in the sale (including any assumed debt). The business valuation must include the individual’s opinion of value, the qualifications of the individual performing the valuation and their signature certifying to the information contained in the valuation. The lender may not use a business valuation prepared for the applicant or the seller. The cost of the valuation may be passed on to the Small Business Applicant.

e) The lender may use a going concern appraisal to meet these requirements if:

(1) The loan proceeds will be used to purchase a special use property;

(2) The appraisal is performed by an appraiser experienced in the particular industry and who is either a ―qualified source as identified in paragraph 5.c) above or has successfully completed the Appraisal Institute course ―Fundamentals of Separating Real and Personal Property from Intangible Business Assets; and

(3) The appraisal allocates separate values to the individual components of the transaction including land, building, equipment and intangible assets.

Life Insurance Requirement: (Pg. 204)

D. Life Insurance

1. Lender must determine if repayment of the loan is dependent upon an owner’s active participation in the business. In other words, if the owner dies, will the business operations be adversely affected and the loan default? In these situations, the lender must require life insurance unless the lender determines due to the adequacy of collateral and/or the presence of secondary sources of repayment that life insurance is not necessary. Lender must document this determination in the credit memo. If the lender determines that life insurance is not necessary and there is a loss on the loan due to the death of the owner, the lender will be responsible for the loss.

2. The amount of life insurance required must be consistent with the size and term of the loan. The amount and type of collateral available to repay the loan may be factored into the determination of the appropriate amount of life insurance.

3. For each policy required under this paragraph, lender must obtain a collateral assignment, identifying the lender as assignee, that is acknowledged by the Home Office of the Insurer. The lender must assure that the borrower pays the premiums on the policy. The lender may utilize an escrow account for the payment of the premiums on the policy. If the lender chooses to use an escrow account for this purpose, lender must follow the escrow policy for commercial real estate taxes and insurance set forth in Chapter 7, Paragraph IV.B.2.c) of this Subpart.

4. The lender may accept the pledge of an existing life insurance policy. When a new policy is required, a decreasing term policy is most appropriate. Credit life insurance or whole life insurance should not be required.

5. SBA Express, Export Express and Patriot Express lenders may follow their internal policy for similarly sized non-SBA guaranteed commercial loans.

Accrual Methods: (Pg. 157-158)

SBA does not require a specific accrual method, unless the loan is sold in the Secondary Market. Loans sold on the Secondary Market must either use 30/360 or Actual/365 as the interest accrual methods. While the interest accrual method 365/360 is permitted on loans not sold on the Secondary Market, lenders are cautioned that they cannot use this accrual method and charge the maximum allowable rate of interest because this will result in an Annual Percentage Rate that exceeds SBA’s regulatory maximum.

SBA Applications

2011-09-14T14:45:00.001-05:00

One of the key tools in an SBA Application is the lender’s credit memo. I outlined last month the important topics that should be in your Credit Memo. This month I would like to point out the importance your credit memo as the starting point for creating an SBA Application package. Each document prepared from here on out should match the terms and conditions of your credit memo. The Use of Proceeds applied for should match that of your credit memo, your borrower, guarantors, rate, maturity, covenants, collateral, etc. should all match that of your credit memo. If at any time throughout this process anything changes, you should start with a material change or file comment to amend your credit memo. The changes should be documented and include an explanation or justification for the change and the affect the change has on the overall credit.

Once you have your bank approved credit memo, you can begin to prepare an application package for SBA. If you’re a Preferred Lender (PLP), this package remains in your file and never goes to SBA. If your not a PLP Lender, you’ll keep the original application package in your file and submit an electronic copy to SBA for loan approval. Some lenders have the expertise in house to compile these applications, if not, I encourage you to engage the assistance of a packager to help ensure your application is well received by SBA and approved in a timely manner.

Some of the SBA forms needed in the application include:

· Form 4—Business Application

· Form 4-I—Lender’s Application for Guaranty Request

· Form 912—Statement of Personal History

· Form 1624—Debarrment

· Form 1846—Lobbying

· Form 4506-T —IRS Request for Transcript.

· SBA Eligibility Checklist

In addition, you’ll need 3 years of historical information on both the business and each guarantor.

If the loan request was approved based on projections, they must include 2 years and the first 12-months must be broke down month by month.

If the loan request is for the purchase of a business or change in ownership structure, a Business Valuation is required.

A Real Estate Appraisal is not required as part of the applications, however will be required prior to closing and must meet the value outlined in the SBA Authorization.

This is not an all inclusive list, but rather gives you a basic understanding of items that may be required in a standard application. Each application brings about its own set of challenges and requirements. If you are unsure what structure is eligible under SBA or what items may be required based on a specific situation, please give us a call.

Underwriting for an SBA Guaranteed Loan

2011-08-10T14:50:00.000-05:00

Working with various lenders, we see many different formats for credit underwriting. Some lenders are more in-depth by providing a thorough story of the project, including history & future. Some lenders are very simple, having only the very basics.

SBA clearly outlines in the SOP 50 10 their underwriting guidelines, beginning on page 184. They expect lenders to adhere to prudent lending practices. Below are some points a lender should include in their credit analysis.

*History & Nature of the Business. Discuss their product, service, target market, locations, seasonality, relationships with other businesses, affiliates, etc. Discuss the business plan, industry and economic outlook, pricing, quality of service, competition and any other relevant information.

*Owners, Managers, key employees. Discuss their interest in the business, experience and role in the business. For those that will be required guarantors, analyze financial strength, credit history, personal cash flow, personal assets available for additional collateral if needed. Document Personal Resource Test required by SBA.

*Financial Statement Analysis. (3 years of Historical and/or 2 years Projections)

*Repayment Ability

*Balance Sheet. Before & After Proposed Loan

*Capitalization

*Accounting Methods. LIFO or FIFO, Cash or Accrual, Billing Cycle and Terms

*Shareholder debt, standby debt or subordinations

*Ratio Analysis (discuss trends and industry comparisons also)

*Source of Equity

*Lender’s Past/Present Credit Experience with Business and/or Industry

*Collateral Analysis. Discuss available collateral, lien position and liquidation values, condition of collateral, source for valuing collateral and need for equipment appraisal. If there is a shortfall of collateral, discuss if other personal assets of guarantors are available to pledge.

EXAMPLE: Collateral Desc. Value Adv. Rt Prior Lien Liq.Value

Comm. RE $100k 75% 0 $75k

Equipment $50k 50% 10k $15k

Inventory $25k 20% 0 $5k

TOTAL $95k

Collateral Coverage .95:1 Loan $100k

*No other assets available to pledge…. OR ….. 2nd mortgage on guarantors home will be pledge in the amount of 1.5 times bringing a liquidation value of $15k to fully secure the loan as required by SBA.

*Sources & Uses. Clearly outline the sources of monies for this project and the use of the proceeds, both loan proceeds and equity injection.

*Site Visit. Consistent with a lender’s non-SBA guaranteed loans, discuss if applicable.

*Business subject to any Federal, State or Local citations or other actions that would preclude it from conducting normal business operations.

*Other relevant information. (ie. Franchise Success)

Lenders should paint a clear picture of the project in their credit presentation. The more information available, the more helpful it is to someone outside the credit to understand the project and how it will come together. This is especially true for those lenders submitting an application through the general process. The more information you have contained in your credit presentation the better understanding SBA will have, increasing your chances for a timely approval of your loan request.

SBA Lending—For the Love of the Program

2011-07-22T11:37:00.002-05:00

Most community bankers I talk to are not excited about doing an SBA loan. I however, am very passionate about SBA lending and enjoy the challenges that come with such a specialized program. I have been doing SBA Lending for nearly 15 years now. I started straight out of college working for a bank that was creating a dedicated SBA Department. As a small community bank in the upper Midwest, we didn’t have a lot of local experts. I saw this as challenge to learn, grow and become the experienced professional this community needed. Because my job entailed nothing but SBA loans, I learned to love the program and the challenges that came with it. I was used to having a pipeline of 10-20 SBA loans at any given time and closing around 5 a month. Having touched more than 500 SBA loans in my time, to me SBA Lending can be as simple as a conventional loan. Lenders that are diligent and follow prudent lending practices, should be able to easily incorporate SBA lending into their product mix.

If you’re interested in SBA lending, make sure you know what the program is really all about. If you don’t have the expertise in house, think about developing a relationship with a qualified service provider or outsource the process. Having someone that can help you through the process and make sure things are done in accordance with the program requirements increases your chances that the SBA guaranty will provide you the coverage you expect.

Part of our services are to review SBA portfolio’s for lenders. This can be a great training tool to help you understand areas that staff may need more training or assistance in. It will also help you better analyze the risk of your portfolio by knowing if the SBA guaranty will provide the recovery you expect. If there are deficiencies in your loan files, now is the time to learn about and correct those issues. Once a loan goes into default, it will be harder to get the borrower to cooperate and assist you in correcting any areas of concern. Since many SBA loans are under collateralized, its important that the SBA guaranty provide the recovery expected. It’s not uncommon for us to see costly mistakes in loan files of lenders that do very little SBA lending. This doesn’t have to be the case, resources are available to assist you in getting them done right.

SBA programs are wonderful, but knowledge of their requirements are important to avoid costly mistakes. So it’s important to have a knowledgeable member on your team. Give us a call today.

By: Kimberly Lahr

SBA Express Loan Tip

2011-07-22T11:14:00.000-05:00

When the SBAExpress program was introduced in 2000, it was a pilot program and had its own program guide. Late 2004 the program was established as a permanent program. The rules of the program have since been incorporated into the SOP 50 10. Lenders should avoid referring back to the original Program Guide as some of the rules may have changed.

Some lenders think of this program as a simple way to get an SBA guaranty without all the hassle. While this is somewhat true, lenders need to realize they are not conventional loans and specific forms and guidelines still need to be followed. SBAExpress loans can be submitted using E-Tran, SBA’s online application. Although this application process eliminates the paperwork for SBA, it does not eliminate the requirement for the lender to have signed and in their file the required forms. These forms include Nos. 1919, 1920 Parts A B & C or Form 2238. Lenders must prepare the SBAExpress Loan Authorization themselves, this is not generated by SBA upon loan approval. All these forms can be found on the SBA Lender website.

If you don’t want to handle the processing of the forms yourself give us a call.

SBA Lending Basics

2011-07-22T11:13:00.002-05:00

SBA Lending shouldn’t be a daunting task that is looked down upon by lenders. While SBA lending may require discipline, commitment and dedication, it should not be feared, rather embraced as a profitable tool to any bank. Don’t let past experiences or other lender’s stories deter you from being part of a positive SBA experience. Having the right people and tools in place are a crucial part of successful SBA lending.

SBA loans can be a profitable lending tool within your bank. Doing it right allows you to mitigate risk and free up capital to lend to other borrowers.

SBA Loans provide borrowers the benefit of more flexible terms, like a longer maturity and/or lower down payment.

If you are interested in SBA lending, it is important to familiarize yourself with the SBA’s Standard Operating Procedures (SOP). There are 4 primary SOP’s that guide you through an SBA loan cycle.

The SOP 50 10 covers Eligibility, Terms, Fees, Loan Requirements for various loans, Closing, and Funding. It also has a special section dedicated to the SBA 504 program. For those of us well diverse in SBA programs, we have many notes and areas marked throughout our SOP’s. This SOP has been re-written in prior years to be more user friendly to lenders.

The SOP 50 11 covers underwriting of an SBA loan. Although this manual is from the early years, it still provides helpful information into the underwriting world. There are some summary guides that have been given a more modern look, which makes for a bit more easy reading.

The SOP 50 50 covers servicing your SBA loans. It give lenders guidance on how to handle various serving scenarios that may come about during the life of the loan. Though this SOP was written for SBA district offices, we are hopeful SBA will re-write this to be more user friendly for lenders in the near future.

The SOP 50 51 covers Liquidation and Workout. This SOP too has recently been re-written to read better for lenders. It provides guidance as lenders go through the process toward a guaranty purchase request.

Each of these SOP’s are available on the SBA website in a PDF format. You can click here for direct web access to the SOP’s through SBA’s website.

Two other tools every lender should use in the SBA lending process is the SBA Application Checklist and the SBA Eligibility Checklist.

These two checklists are not meant to be a substitute for the information covered in the SOP 50 10. It is important to note that these are tools to be used in conjunction with the SOP 50 10. Please be sure to refer to the SOP’s for detailed information on specific lending scenarios.

We understand that not all lenders have time to read through this material and keep up with changes. If you don’t have someone on staff to do this, we are here to help. We work only when you need us and offer our services at a fraction of having a full-time on-staff expert.

Outsource Solution

2011-07-22T11:08:00.001-05:00

Community Banks have outsourced a variety of their services for many years. SBA lending too can be outsourced. We at sbaSTRATEGIES can help take your lending to the next level with services in loan packaging, closing & funding, servicing and request for guaranty. We also help with training staff, file review and development of SBA policies and procedures. Isn’t it time you get an experienced professional on your side, increasing your chances of turning a profit instead of a disappointing loss. Give us a call today to find out how we can fit into your business model. We’ll bring you ease and piece of mind from beginning to end of the SBA lending process.