Here you are, handling high-volume originations, applications, packaging and processing. And lo, several existing loans are showing signs of stress. Do you take a deep dive into servicing and liquidation, possibly letting the loan sink along with the guaranty? Or do you throw a lifeline, see what actions could save the guaranty and keep your borrower in business? After all, protecting the guaranty and/or realizing a maximum recovery are your goals.
Early on, watch for red flags. Loans in distress don’t just pop up. There are always warning signs indicating a troubled business. Catching them early gives you a better chance of possible recovery. Red flags to watch for:
- Requests for Address change
- Mail returned as undeliverable
- Changes in management
- Funds not available from auto-pay deposit account when payments are processed
- Manual payments are received later than usual
- Release of collateral, guarantor, et al
- Business deposit account balances start to decrease and/or funds are not sufficient to cover checks written
- Notification of unpaid taxes
- Delays in receiving updated financial statements
- Substantial changes in revenue and/or net income
- Receiving insurance cancellation notices
- Payoff requests received from senior lien holders
What now? Throw a lifeline? Generate a new opportunity? Each of these items should trigger further investigation ASAP. At the very least, call the business owner. Are some items, such as insufficient funds for a payment, the result of a short-term hiccup or other one-time mistake? It could be that growth is moving faster than anticipated and cash is short. Instead of a shut-down, this could be prime time to consider a working capital or other extension of new credit.
Diving deeper. Conduct a site visit. Your site visit must be conducted within 45 days of payment default and 15 days of an adverse event. Bring the fixed asset list with you from the loan origination and note changes to any collateral and ask the business owner the reasons for any discrepancies. Your site visit will help you determine next steps.
Handling servicing situations. You’ve determined servicing is in order. It’s important to refer to the Loan Authorization, SOP 50 57 2 and the Servicing and Liquidation Matrix when addressing servicing issues, make sure actions requiring prior SBA approval are handled accordingly. Also, if there are specific SBA notification requirements, timelines for action, or specific analyses to support servicing actions, they must be adhered to. These actions will alleviate any issues in the final review if a guaranty purchase becomes a reality.
Document, Document, Document. Support your actions in a credit memo detailing your analysis of the borrower’s current personal and business financials along with tax returns for the most recent two years and the interim period. Justify your actions by including in your liquidation analysis the cost/benefit of your options, e.g., foreclosure vs. workout. We recommend working in table format so SBA can see your comparisons side by side.
And as always, your JRB Team is here to put our 25 years of serving the SBA lending community to work for you!