June 1, 2018

Credit Elsewhere in SBA Lending: What Is All This Hub Bub About?

The U.S. Small Business Administration was created in the 1950s for a very good reason.  Conventional lenders were not providing access to capital for small business and the government needed to step in to help facilitate lending.  Program features like lower equity requirements, less or no emphasis on collateral, start-up financing and other benefits have been introduced to small business to get conventional lenders to take more risk.  Selling the guaranty on the secondary market turned out to be one of the greatest incentives for lenders to jump into the fray.  More recently, during the 2008 recession more innovative programs like the Community Advantage Program were developed to support one of our most important resources, small business here in the United States.

Well folks, we are coming full circle.  It seems the program is attractive for lenders and is being used in record levels to support small business. We may get close to the $30 billion in lending. An interesting note:  this initiative has worked!! Nothing is ever static with Congress, clearly.  It is no secret, Congress wants to make sure they have no egg on their face and have charged the SBA Office of Credit Risk Management to make sure we, as an industry are operating between the white lines.  We are hearing all kinds of buzz words at the conferences and speculation as to what is coming down the pike for lenders, lender service providers and all those affiliated with this industry.

One of the most talked about subjects in SBA lending over the last year is “Credit Elsewhere” and are we making loans to small businesses that could otherwise obtain conventional financing? We did away with the personal liquidity test to allow for better healed borrowers to support small business only to have it come back in a different costume.  I guess the recession is over and we must now start becoming a bit more restrictive in our lending, given we are approaching the $30 billion mark.  We want to provide more loans to rural areas, and then we start restricting agricultural lending and lending to poultry farms.  I see us talking out of both sides of our mouth but not much we can do, I guess.  A few AG lenders are trying to challenge some of these new requirements, but I am not sure success is over the horizon.

Back to “Credit Elsewhere” …. No financial assistance shall be extended if the applicant can obtain credit elsewhere, and the Lender must certify that the Applicant does not have the ability to obtain some or all the requested loan on reasonable terms from non-Federal sources without SBA assistance.  This certification is not a box-checking exercise as it has been common in the past, and Lenders must include in the Credit Approval Memorandum a sufficient and detailed determination. SOP language allows to test factors against the Lenders conventional polices, but this must be a fully documented conclusion and compared to loan policy.  I am not going into the details of how to evaluate or determine Credit Elsewhere as NAGGL, Coleman Publishing, The Preston Group and the SBA District Office webinars have or are going to review this in detail.

My advice is to get your loan policy out, make sure you understand the requirements and document them in detail and then wait until the next recession before we see a change.

J M Chuck Evans
President & CEO
Capital Growth Solutions, LLC

If you would like to speak with someone about Credit Elsewhere or how Capital Growth Solutions can help grow your SBA lending, please contact us toll free at 833.782.7293.