U.S. Small Business Administration (SBA) guarantees are the cornerstone of SBA loan programs. This credit enhancement certifies to lenders that if a borrower defaults on an SBA-approved loan, the SBA will purchase the guaranteed portion of the loan. SBA guarantees typically cover 50% to 85% of the value of each loan. This substantially reduces the risk that lenders assume when working with startup or expanding businesses, especially in industries that may be challenging to finance. Likewise, the SBA guarantee is catered to small business clients who have difficulty obtaining conventional bank financing for whatever reason.
The SBA’s guarantee is conditional (as opposed to unconditional). From origination to liquidation, lenders must adhere to specific rules for and record keeping of their files in order to retain the SBA’s guarantee. At Prudent Lenders, we work closely with our partners to alleviate any and all lending pain points, whether observing protocols or maintaining SBA guarantees. Nonetheless, it’s helpful for our clients to overview the requirements as well.
Here are three tips to ensure that your institution’s SBA guarantees are protected:
Track equity: See, source, spend
The SBA requires that lenders provide evidence of a borrower’s equity injection (i.e. contribution to a project) and ensure the funds aren’t fraudulent or borrowed. The phrase “see it, source it, spend it” is an easy way for lenders to remember the required process.
- See the equity: Follow the funds into the borrower’s business account. If monies are being spent prior to loan application or loan closing, obtain copies of invoices and receipts for services, products, equipment and/or other uses. Equity should be seasoned; and ideally, funds should stay in the business depository account for a minimum of two months prior to injection into the project. The borrower must supply relevant deposit statements attesting to such a timeline.
- Source the equity: For unseasoned funds, follow the money into the borrower’s account and track how they are derived. At this point, the source of equity may be multi-layered (i.e. general operating funds, personal funds, affiliate corporate funds, gift funds, etc.). How the money is derived will dictate necessary action. For instance, gift funds require a gift letter and source documents; whereas personal or affiliate corporate monies may require a subordination depending on how these funds are injected into the project.
- Spend it: How are the funds used? Lenders must obtain and keep copies of checks along with accompanying invoices detailing how funds are spent.
The SBA’s authorization and SOP requires lenders to obtain specific collateral. If equipment is taken as collateral, the SBA requires a list of said equipment, including serial numbers for items more than $5,000.00 in value. The list should be signed and dated by the borrower for the loan file. In the event no serial numbers are available, the list should state that. In some cases, third-party valuations may be required such as appraisals or business valuations.
What do you do when your borrower is faltering on their payments? In these instances, it’s best to be proactive. Getting ahead of the challenge may mean the difference between a restructured loan versus a liquidated loan. Still, to temper moments of human crisis, you should understand what is required by the SBA for a defaulted borrower.
If a borrower is behind on loan payments by 60 days or more, the SBA calls for a representative from the lending institution to conduct a site visit in a timely manner. Likewise, if something may have a substantial negative impact on the borrower or the business—such as a natural disaster—the lender is required to make a site visit within 15 days of the event.
Site visits help lenders assess a business’s physical circumstances. Being onsite yields firsthand knowledge as to a borrower’s short-term needs and to potential long-term solutions.
Prudent Lenders maintains SBA guarantees
In addition to the action items mentioned above, it’s imperative that all loans are closed in adherence with SBA authorization and serviced wisely. With our partnership, you can minimize the time and resources spent on learning and applying SBA rules – we’re here to do the heavy-lifting.
Among our full suite of offerings is unmatched assistance regarding SBA-guarantee products. We enable your institution to stay compliant so your SBA-guarantees are there when you need them! Get in touch today if you have questions regarding the closing or servicing of one of your loans. Not a partner yet? Contact us to learn how Prudent Lenders will expertly protect your SBA guarantees by skillfully closing and servicing your loans.