Small business lending is a great way for your bank to build relationships with your local business community, and SBA divisions are often profitable sources of non-interest income for banks. While SBA loans can offer much more favorable terms for business owners than traditional financing, they also give your bank the opportunity to fill your lending portfolio with helpful loans.
At SBA Complete, we help banks source, fulfill, sell, service, and support the SBA loans on their books. Here are the 10 most-overlooked items we see when banks process new SBA loans:
1) Cash Flow/Repayment
Have you looked at each applicant’s books to see if they have the ability to repay the loan, based on the last three years of historical financial information, from their business cash flow? If you’re working with a new business, has the applicant submitted detailed projections that include supporting assumptions reflecting positive cash flow within two years?
2) History
Have your applicants submitted detailed descriptions of their business histories, including the depth of management experience they have in their industry or a related industry?
3) Debt Service
Calculate debt service coverage and assumptions supporting the projected cash flow coverage. Current industry trends comparisons must be addressed within these calculations.
4) Key Ratio Calculations
You’ll need to consider and include key ratio calculations such as Current Ratio, Debt/TNW, DSC, and other ratios deemed significant to the relevant business/industry (e.g., inventory, receivables, payables, etc.).
5) Working Capital Analysis
A detailed analysis of working capital adequacy must include no fewer than 12 months.
6) Collateral Adequacy Assessment
According to the SBA’s fully secured rule, lenders must collateralize each loan to the maximum extent possible, up to the loan amount. And if an applicant’s fixed assets don’t fully secure the loan, then you may have to take available equity in the applicant’s personal real estate as collateral.
7) Insurance Requirements
The Small Business Administration maintains extensive insurance requirements for SBA loan applicants, including hazard, real estate, flood, personal property, marine, life, liability, malpractice, disability, and workers’ compensation, to name a few. Insurance requirements differ depending on the loan and the business, but some form of insurance is required in all cases.
8) Refinancing Explanation and Justification
If your applicants are using SBA loans to refinance debt, they are required to submit a detailed explanation of, and justification for, the refinancing as a part of the loan request.
9) Equity Requirements
Does each applicant’s business structure meet relevant SBA equity requirements and does your report include the source of each applicant’s equity?
10) Lender’s Rationale
The Small Business Administration requires a recommendation as to why each applicant’s loan should be approved. Your recommendation must include an analysis of the following:
o Written evidence that credit is not available elsewhere without SBA assistance
o Competition
o Seller Financing
o Stand-by Agreements
o 90+ day delinquencies
o Trade disputes and/or federal, state, or local citations
o For change of ownership, discussion and analysis of the business valuation used to support the purchase price
o Review of any liens, judgments, bankruptcy filings, or pending litigation (including divorce proceedings)
o Discussion of other relevant information
This is by no means an “all-inclusive” list. However, failure to adequately address these key components within a credit analysis may jeopardize your ability to collect on your SBA guaranty.
As one of the top SBA Lender Service Providers in the country, our team of highly experienced SBA underwriters can provide you the confidence that all SBA requirements will be met, and that your SBA guarantee will be secure.
Contact us today.