SBA 7(a) LOAN PROGRAM GENERAL UNDERSTANDING

SBA business 7(a) loan programs are initiated by a lender who is considering a business loan that otherwise would not meet their minimum lending requirements. SBA does not make loans but agrees to guaranty a portion of the loan that meets minimum SBA requirements.

 ELIGIBILITY REQUIREMENTS

·         The applicant must be: An operating business, organized for-profit, located in the United States.

·         Loans are for capital purchase, working capital, cannot be used for investment or to payback owner’s investment;

·         The applicant must show that  funds are not available from alternative sources, including personal resources of the principals;

CREDIT WORTHINESS

Lenders must analyze each application in a commercially reasonable manner, consistent with prudent lending standards. On SBA-guaranteed loans, the applicants’ cash flow is the primary source of repayment, not the liquidation of collateral. Thus, if the applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available.

The lender’s analysis must include (rules subject to updating by SBA):

1.       History and nature of the business.

2.       A business plan including financial condition of the business, market opportunity in the area and competition.

3.       Owners’/managers’ relevant experience in the type of business, as well as their personal credit histories.

4.       A financial analysis of the applicant’s current balance sheet before and after the loan to include any required adjustments such as any equity injection, including a discussion of its adequacy, or stand-by debt.

5.       A financial analysis of repayment ability based on tax returns and historical income statements and projections, including the reasonableness of the supporting assumptions.

6.       A ratio analysis of the financial statements including comments on any trends and a comparison with industry averages.

7.       A discussion of lender's credit experience with the applicant and a review of business credit reports.

8.       Other relevant information (for example, if the application involves a franchise, the success of the franchise).

9.       A determination that equity and the pro forma debt-to-worth are acceptable based on the factors related to that type of business, experience of the management and the level of competition in the market area.

10.   An analysis of collateral adequacy, including an evaluation of the collateral and lien positions offered as well as liquidation values.  A loan request is not to be declined solely on the basis of inadequate collateral. In fact, one of the primary reasons lenders use the SBA-guaranteed program is for those Small Business Applicants that demonstrate repayment ability but lack adequate collateral to fully repay the loan if the loan defaults.

a.       SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount. If business assets do not fully secure the loan, the lender must take available personal assets of the principals as collateral.

b.       When loan proceeds will be used to purchase assets, a first security interest in those assets must be obtained. When loan proceeds will be used to refinance existing debt, the loan must be secured with at least the same security as the debt that is being refinanced.

c.       SBA considers a loan as “fully secured” if the lender has taken security interests in all available assets with a combined "liquidation value” up to the loan amount.

d.       Individuals who own 20 percent or more of a Small Business Applicant must provide an unlimited full personal guaranty. Lenders may require other individuals to guarantee the loan as well.

11.   SBA requires an Environmental Investigation of all commercial Property upon which a security interest such as a mortgage, deed or trust, or leasehold deed of trust is offered as security for a loan or debenture. May apply on 7(a) loan but especially important on 504 loans. The type and depth of an environmental investigation to be performed varies with the risks of contamination because:

a.       The costs of remediation could impair the borrower’s ability to repay the loan and/or continue to operate the business;

b.       The value and marketability of the property could be diminished.

c.       If the borrower defaults, lender or SBA might have to abandon the property to avoid liability or accept a reduced price for the property;

d.       Lender or SBA could be liable for environmental clean-up costs and third party damage claims arising from contamination if title to contaminated property is taken as a result of foreclosure proceedings and/or lender or SBA exercises operational control at the property;

e.       If a governmental entity cleans a site, it may be able to file a lien for recovery of its costs which may be superior to SBA’s lien.

12.    SBA requires formal business valuation when:

a.       The business is sold to a family member regardless of the size of the loan. The reason family member loans face greater scrutiny is because they are not “arms length” transactions and the sale price may not reflect an accurate price.

b.       All other businesses are required to have a certified valuation if the loan amount exceeds $350,000.

c.       Cash flow, equipment on hand, inventory and brand name recognition are all factors used to determine the final value of a company. When these factors are combined by someone who is certified to conduct an audit of the condition of a business, they are able to determine the fair market value of a business.

d.       Businesses that have limited or no cash flow are not necessarily worthless, although they may be valuated lower.