Once a SBA Loan is put into liquidation status, the first step a SBA participant bank must take is to prepare a liquidation plan. Even though in a majority of cases, the liquidation plan will not require review and approval by SBA, it is a document that SBA expects to see in a well-documented loan file and a necessary step in the proper liquidation of a SBA Loan. On 7A loans, the only liquidation plans that require review and approval by SBA are those loans made by CLP lenders. A proper liquidation plan touches base with 8 areas of information and should be a guide to the proper liquidation of your SBA loan.
- The first area of information is the site visit findings. In this section, the lender will provide a general narrative about the collateral that was originally taken reconciled with the collateral that is actually on site. The condition and marketability of the collateral should also be discussed. Issues such as Care and Preservation of the collateral should also be discussed in this section as well.
- Another area is the feasibility of a loan workout. Even though the loan is in liquidation, SBA’s objective in their lending program is to find a way for the small business borrower to pay the loan back. The lender should assess whether a workout is possible and if not, what are the reasons that a workout is not possible.
- The third step is to assess the recoverable value of the equipment. New appraisals and valuations should be ordered unless a recent one is available. The lender will assess the discounted value of each area of collateral. The lender should also project liquidation activity expenses and calculate a net recoverable value for each area of collateral as well as a total recoverable value.
- A fourth step is to assess the methods of liquidation and the pros and cons with each method. Techniques such as foreclosure, repossession, and litigation should be discussed here with a determination of which methods of liquidation will help to maximize the recovery on the loan.
- Routine litigation should be discussed. Non routine litigation or litigation that expected to exceed $10,000 in expense will require the preparation of a litigation plan. SBA will expect you to take legal action to acquire the collateral and to pursue the guarantors if it is feasible.
- We will also need to discuss the status of senior liens. Frequently on SBA loans, the collateral taken is in a junior position. We need to discuss the senior lien holder’s position, who they are, how much is owed, and are they taking liquidation actions on the collateral. We need to evaluate if buying out the senior position makes sense in maximizing the recovery on the SBA loan.
- We need to assess the obligor’s ability to repay the loan. In this section we should summarize the most recent tax returns and personal financial statements. An asset search and credit report should be ran to determine the financial condition of the obligors and what ability they have to repay the loan or a portion of the loan.
- Finally, we need to discuss the non SBA loans that the bank has with the borrower or guarantors. The Liquidation Plan must disclose whether the Lender has any non-SBA loans to the same Obligor(s), and if so, indicate how the liquidation and litigation expenses and recoveries will be allocated.
A liquidation plan is a necessary file document and a guide to maximizing recovery for a SBA Lender. If your bank needs assistance or has questions about liquidation plans, please do not hesitate to contact Prudent Lenders at www.prudentlenders.com or you can contact me directly at email@example.com.