It’s Thanksgiving time. Almost, anyhow. Yep. Soon folks will decorate their offices for the holiday season. Then on with the office parties and other holiday events for you and your staff. Your break room will fill up with all sorts of homemade goodies. And your family and friends will visit for the holidays.
Everybody will make merry and overflow with glee.
All except you: the lonely shepherd. You’ll be sitting in the office spreading last year’s financials on all your loans and risk rating them in compliance with SBA’s requirement for annual risk rating, if not more often. Already planning your New Year’s Resolution? You hereby resolve to risk rate as soon as financials come in so they won’t pile up and leave you out in the cold.
You know what the loan Authorization says: If you use the standard language, borrowers are required to submit financial statements within 120 days of their fiscal year end. Most businesses have a year end of December 31. So you should receive yearend financials on your borrowers by April 30.
Got a problem with that? “But Richard!” you say, “The business hasn’t filed its taxes yet. They’ve got an extension and don’t have to file them until October!”
Bah Humbug. Here’s the deal. Yes, I know they have an extension. But check out your Authorization. It’s right there, probably in paragraph E “Additional Conditions.” The boilerplate language says you must have the Borrower and the Operating Company “Furnish yearend statements to the CDC within 120 days of fiscal year end.” It doesn’t say, “Extensions to file tax returns.” It requires financial statements. Period.
Assessing risk in a timely manner is the primary reason for obtaining financial statements. If you wait until, say November, to receive income taxes, you’ll be assessing risk based on financials that are nearly a year old. That’s way too long to discover an adverse change in your borrower, or that it has leased out the space it promised to occupy, moved, or changed its name, owners or line of business. And yes, although SBA doesn’t say so, the required annual risk rating is supposed to be based on current information.
Our holiday advice for you. At JRB, we advise our clients to get their borrowers’ yearend financials in by April 30 and have them risk rated no later than August 15. That gives you 100+ days to spread and risk rate your loans. It also gives you half a year or more to do something a whole lot more fun than risk rating. I’ll bet you can think of what that could be.
Timely risk rating also gives you a chance to prioritize your servicing efforts, to focus on borrowers who may be hovering at break even or below, and to show SBA that you’re on top of your portfolio. Just like the Agency wants you to be.
Here’s another reason to complete your annual risk rating as early as possible: You can’t go to the office Holiday party until you’re done!
So next year, keep that New Year’s Resolution. Complete your risk rating in a timely manner. Before the Risk Rating Grinch steals your Holidays!
Senior Associate, CDC/504 Programs