Hot summer nights are coming. With them come those pesky flying critters. We keep our screen doors shut tight. Not so with SBA loans. From application to funding, we want loans sailing through wide open doors. Yet SBA’s screen doors await. Like creatures in the night, pesky issues can slam up against them, causing screen outs and declines. Not to mention that screen outs affect ALP review considerations now, CDC reviews down the road – and your bottom line.
Avoiding and reducing screen outs. It’s a given: Be proactive. Treat issues like the critters that spoil BBQs on your patio. Swat ‘em. Net ‘em. Zap ‘em. Do away with as many as possible before they hit SBA’s screen door. As an industry, we’re working with larger, more complex loans and increased regulations and oversight, all the more reason for full disclosure, transparency, detailed underwriting, and accurate credit memos. And importantly, the requirements in SOP 50 10 61.
From a presentation I gave recently, here’s a quick snapshot of a few creatures that can come back to sting you:
Purchase Agreement. No signature on the real estate purchase contract; outdated purchase contract; address on the purchase contract doesn’t agree with other documents; name of buyer doesn’t agree with other documents.
Construction Projects. Costs must match supporting documents TO THE PENNY. No box car numbers allowed; Construction bids must be on the contractor’s letterhead with contact information, address, license number, plans and specs information; Equipment costs must be vendor estimates or supported by outside sources (e.g., equipment catalog).
Do it Yourself Construction. Owner must: demonstrate experience in the specific type of contracting, have all appropriate licenses, and provide comparable bids from at least two contractors not affiliated with the borrower.
Financing Special Purpose Property. If the applicant or its affiliate already has an outstanding debenture for a special purpose property and the applicant or an affiliate is applying for a loan for another Special Purpose Property, the Borrower must contribute at least 20% for that project and each subsequent Special Purpose property, unless the project is a debt refinance of the original 504 project at the same location.
PDI. In determining PDI, affiliate income may offset personal obligations and living expenses. However, outside income may not be added to the business cash flow.
Borrower Contribution. Source of borrower contribution must be documented and available at the time the application is submitted.
TPL ISSUES. Credit Elsewhere still applies to 504 loans. SBA requires both the CDC AND the TPL to state that credit is not available without SBA support. The TPL must state WHY, and the CDC must state that it has determined that some or all of the loan is not available from any of several sources.
Credit. Provide current business and personal credit reports on the Applicant; Proprietor, partner, or stockholder with 20% or more ownership of the Applicant and if requested, Key Employee; affiliates; and Guarantors. Describe credit in terms of length and depth not just “credit is excellent…perfect…cool…very good, just ducky.”
Stingers. Derogatory information about an applicant’s past is rarely disqualifying unless it isn’t disclosed and later discovered by SBA in performing due diligence. Include and explain all derogatories in full.
Nobody’s perfect. Screen outs happen. Track and review screen outs in-house to reduce recurrence. Eligibility errors trigger many screen outs so be sure to check out the SOP’s eligibility sections. When a screen out happens, document the response to avoid future contacts with the screen door!
Senior Associate, CDC/504 Programs