More Changes in the SBA Process

 

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

 

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

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

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

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.