This post is part four of a four-part series on developing an SBA lending strategy.
A successful SBA lending initiative starts with a solid plan, is built by a qualified team, and is delivered through a well-defined and repeatable process. The process, or more importantly the lack of a process, is where most lenders run into trouble. The bulk of the trouble manifests as inadequate risk management and compliance with SBA standards. On the other hand, a good process can also defend against inefficiencies and frustrations that can impact the borrower’s experience and the lender’s bottom line.
Elements of a Sound SBA Loan Process
There are several key elements to developing an efficient and compliance driven process for SBA lending.
Prequalification and Eligibility
This is the first step in the process and critical to not only setting the deal up for success, but for determining if an SBA loan is a viable option in the first place. You don’t want to waste valuable time and resources going down the SBA trail if the borrower or project are ineligible. Properly pre-qualifying structure also helps identify the necessary documents and steps needed to get a complete submission to the SBA. This includes understanding affiliates, whether any environmental surveys need to be completed, if franchise agreements are verified with the SBA, etc.
This element can make or break any loan, but especially any SBA loan. Identifying what documents are needed and collecting complete, accurate versions of those documents from the borrower in a timely fashion is critical to pulling together a compliant and complete loan package. Having a system for collecting, tracking, and processing all loan documents is critical to the success of your loan program.
A sound process also takes into account the demands of the loan application and submission on the borrower. It’s important to set realistic expectations and to communicate often with your borrower. It’s also important not to hit them with everything at once, as that can overwhelm them and completely turn them off to the idea of a loan. Having methods in place to support the borrower throughout the loan process leads to a more enjoyable experience overall and a more responsive borrower.
Measure and Monitor
Each stage of the loan process, from intake to servicing, have different demands and different constraints that impact the overall timeline of the loan. Knowing what is standard for time and effort for each stage and utilizing tools and methods to track and monitor progress helps keep the loan on track. Our typical loan process takes 60 days from handshake to close. This is largely dependent on receiving documents in a timely fashion from the borrower and the lender’s cooperation. Still, it serves as a benchmark for us to measure against and to identify problems in the process.
Frequent Bottlenecks and Pitfalls
With any process, there are critical factors that can slow or even derail the entire loan. In our experience, these are the most common factors that negatively impact the loan process.
Life insurance and a collateral assignment to the lender is generally required for all guarantors. This requires significant time to get from the insurance provider and to get processed by the SBA.
There are a number of challenges and issues that can arise when a business has affiliates, especially if there are multiple affiliates and/or multiple owners. Not only does this impact the timeline, it can impact eligibility if any of the affiliate businesses are not qualified under SBA eligibility criteria (such as adult entertainment or gambling establishments) and/or if the affiliates also have government loans that are not current. It is crucial that all affiliated businesses be identified and evaluated to determine if they impact eligibility. If they are eligible, then they must submit all required documentation and it must be checked for accuracy.
Borrowers must be vetted by the credit elsewhere test, which determines whether or not they have adequate funds available from liquid personal assets that could be used instead of guaranty loans to meet the project needs. This test applies to all 20% owners of the entity, not just the primary guarantor. The SBA recently approved the updated credit elsewhere guidelines which are located here.
The SBA needs to see an appropriate amount of injection which should be thoroughly supported by adequate documentation. The equity injection also cannot be sourced from borrowed funds. This item in particular was noted as a failure on several high-risk loans that were recently audited by OCRM.
Sources and Uses of Funds
The sources and uses of funds must meet SBA eligibility requirements. They must also be consistent throughout all documentation.
This is another key issue noted in the recent audit by OCRM. The loan package must be supported by complete and accurate documentation. This includes documentation on injections, ownership, uses of funds, eligibility, and other loan elements. If a loan is audited and/or defaults and the SBA discovers missing documentation, the lender is penalized.
Again, a sound process takes into account the borrower’s experience while also ensuring due diligence and compliance to SBA standards. Small and mid-sized institutions who are not experienced in SBA lending would be best served by bringing in a third party to help them develop their SBA loan process and compliance controls. Lender Service Providers, such as Capital Growth Solutions, offer this service to their lenders. If you need help developing or improving your SBA loan process, you may contact us to set up a consultation.