As with other financing options, U.S. Small Business Administration (SBA) loans may be administered in multiple disbursements depending on the loan’s use and terms. It’s important that lenders adhere to the SBA guidelines when disbursing a loan to protect their guarantee.
We asked Shirley Cowan, multiple-disbursement coordinator at Prudent Lenders, to help us break down how the multiple-disbursement process works in a helpful FAQ. Before joining Prudent Lenders, Shirley worked in various facets of commercial banking for more than 20 years, and her experience with the multi-disbursement process provides great insight.
Streamlining the multiple-disbursement process
Q: First, what are multiple-disbursement loans and when do lenders and their clients encounter them?
A: In a nutshell, multiple-disbursement loans are those in which the total approved amount is disbursed in several payments over time, rather than as a single, lump-sum payment during the SBA loan closing process. A great example of a multiple-disbursement loan is one that’s made for construction or renovations to real estate. A payment may be made initially to acquire a property and, later on, additional disbursements are made when specific steps are completed, such as plumbing, electrical or finishing work. This is the most common use, although there may be others.
Q: When does a borrower typically learn that a loan will be made in multiple disbursements, rather than as a lump sum?
A: A multiple-disbursement loan structure is agreed to as part of the loan-approval. i.e. Borrowers should be made aware that they won’t receive all the funding at once. As a best practice, lenders should communicate this detail in a letter of interest (LOI) and/or a commitment letter.
Q: What should clients expect of Prudent Lenders when working on a multiple disbursement loan?
A: Great question! We’re here to reduce the amount of back-and-forth between the lenders, borrowers and our team to simplify the process for everyone. Our clients receive a checklist for each disbursement to make sure that the needed information is clearly articulated and (as a result) collected.
We also monitor project progress and ensure that the requested funds are specific to and appropriate for each project. This way Prudent Lenders proactively alleviates several project-monitoring and disbursement-review challenges on behalf of our clients.
Q: What kind of information is typically needed for a disbursement?
A: It’s simply information about the borrower and/or their vendors. For each disbursement, a typical package will include:
- Any/all applicable invoices, canceled checks and/or credit card statements.
- Completed W9s for the vendors (for all non-depository lenders). Each vendor needs to submit these once if the same vendor is paid multiple times over the course of a project (as may be the case, for example, for a general contractor).
- The borrower’s signed and dated “Authorization for Disbursement”.
- If applicable, a clear title update that’s free of contractor and/or vendor liens.
- Fully executed lien waivers for any contracted work.
- Wiring instructions from the vendor(s), if payments are made electronically.
- The borrower’s physical address and phone number, so that vendor and reimbursement checks can be sent via FedEx.
We recommend that borrowers send the disbursement checks to their vendors, rather than having the lenders do it. Although it’s not mandated by the SBA, it’s considered a best practice.
Q: What’s the best way for lenders to submit the information to Prudent Lenders?
A: For each disbursement request, we ask that lenders digitally submit all information via email and that it’s [all] sent together. This makes it easier to ensure a disbursement is complete and ready for review.
Q: How long does it take for borrowers to received funds?
A: Once we have a complete package, it’s a quick process – disbursements are normally made within five business days of our satisfactory receipt and review of a complete request.
Q: Do you have any other tips for lenders?
A: Sure, there are several things lenders can do. Here are a few of the most important tips:
- Keep copies of everything for each disbursement and save them in your loan folders, even if they’re not explicitly required in the SBA guidelines and no matter how minor they seem. For example, copy all checks, wire confirmations and signed disbursement authorizations, and be sure to copy and upload overnight-delivery labels like FedEx and UPS labels.
- Prior to releasing loan funds be sure to process any needed reallocations using SBA Form 327. Reallocations may happen when there are cost savings on a project or, conversely, if there are shortfalls due to unexpected costs or cost overruns.
- We also advise lenders to set up spreadsheets to track multiple contractors and contracts, disbursement details, loan balances, final disbursement requirements and anything else that could be useful in tracking the overall project. Additionally, lenders will need to be familiar with SBA appraisal requirements for commercial properties. Taking this step early on makes things much easier throughout the life of each loan.
Prudent Lenders is always available to help when lenders need additional assistance or guidance. We look forward to working with you.