SBA updates Rules for SBA 7(A) Loans

The U.S. Small Administration ("SBA"), updates to become effective on January 1, 2014, provides lenders with additional requirements for underwriting analysis when considering a 7(a) loan. Cash flow remains the key factor as the primary source of repayment for the proposed loan.  If an 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 or outside sources of cash."  This statement reflects current practice by many lenders and SBA has added several new standards and requirements to verify adequate analysis.   

Analyzing the repayment ability of an applicant will be based on historical financial statements and tax returns (if an existing business) and detailed projections.  Analysis must support the following assumptions: 

1. Analysis of historical cash flow should demonstrate total debt service coverage after the SBA loan;
2. Define operating cash flow as "EBITDA" earnings before interest, taxes, depreciation and amortization;
3. Analysis must document additions and subtractions to cash flow;
4. Debt service is defined as required principal and interest payments on all business debt inclusive of new SBA loan proceeds.  The applicant's debt service coverage ratio must be 1.15 to 1 or greater on a historical and/or projected basis;
5. Spread of pro-forma Business Balance Sheet (current business balance sheet + changes in assets and liabilities as a result of the loan, other debt, any required equity injection, and use of proceeds);
6. Ratio calculations for:  Current Ration, Debt/Tangible Net Worth, Debt Service Coverage, and other ratios the lender considers significant for the business/industry (e.g. inventory turnover, receivables turnover, and payables turnovers, etc.);
7. Analysis of working capital adequacy to support projected sales growth in the next 12 months