The Meyers Report: SBA and the 4 Cs

SBASBA Loans Growing In Number On May 4th, the SBA reported that year-to-date, there have been 26,010 SBA 7-A loans issued for a value of $9.739 billion. While this is up from last year’s Y-D of 25,047 and $8.094 billion, it is down from 2011 by 23.95% in loan count and 26.65% in dollars. With many commercial loans of all types coming due this year and next, having access to refinance SBA programs will be critical. However, the SBA’s refinance capability expired last September and is still awaiting renewal. This will be critical for any economic recovery.

If borrowers want to get real estate loans in this market, borrowers need to pay attention, have patience and be realistic. The following illustrations are true.

Borrower #1 wanted to refinance an apartment loan. The appraisal showed a loan-to value ratio at 85% and the property cash-flowed at about 1.5. The property was in excellent condition, the borrower was experienced, and both the apartment project and the market actually had a virtual “zero” vacancy rate. This should have been an easy approval.

However, the borrower failed to tell the lender that he was under investigation for bank fraud. The lender only found out after the indictment came down and then from a third-party source. It did not matter that the borrower was innocent and that all the felony charges eventually were dropped four months later. What did matter was that the borrower did not alert the lender. Had the loan been consummated, the borrower could have been charged again for a fraudulent loan application.

Interestingly enough, had this borrower disclosed the issue early enough, complete with the knowledge of innocence, the ownership could have been restructured in a means that would have been satisfactory to all parties concerned, including the properly informed lender. But that did not happen and the borrower was tainted—forever.

Borrower #2 was a small manufacturer seeking an SBA loan. The borrower wanted to buy a new building for a larger, more efficient plant. In this case, the borrower told the lender of their poor personal credit ratings. The issues were numerous, but minor in nature and very fixable. They properly informed the lender, and since they were paying all of their bills, things looked promising for their building acquisition.

However, they failed to mention an IRS issue about unpaid employee withholding taxes, and they forgot about the pending wage and hour complaint with the state labor department, and the resulting judgment against them for misclassifying employees, and their payment. The lenders discovered these issues. Their new problem was one of character, knocking at least one willing lender out of the offering due to the borrower’s history and attempt at deceptiveness.

Know the four Cs of lending: Character, Collateral, Credit, and Cash flow. Effective April 30, 2013, the SBA modified “C”haracter requirements.

Character—Lenders look at borrower behavior past and present. SBA Form 912, Personal History Statement, is required to determine eligibility for an SBA loan for anyone owning 20% or more, or running, or managing a business. The net effect is that anyone with any criminal history of any type (other than minor traffic violations) could be denied. The underlying modifier is that some explanations for past behavior may be considered, primarily for youthful indiscretions possibly being forgiven, but not without detailed examination. The questions include:

  1. Are you presently subject to an indictment, criminal information, arraignment or other means by which formal charges are brought in any jurisdiction? (If answered “YES,” the loan application is not eligible for SBA financing.)
  2. Have you been arrested in the past six months for any criminal offense?
  3. For any criminal offense, other than a minor vehicle violation, have you ever:
    A.  been convicted,
    B.  plead guilty,
    C.  plead nolo contendere,
    D.  been placed on pretrial diversion, or
    E.  been placed on any form of parole or probation (including probation before judgment)?”

Collateral—The property has to have value to back the risk of the requested loan.

Credit—Borrowers should get documentation together and respond quickly to information requests from lenders. Be prepared for additional requests from questions raised by the documents provided. Cash flow—The business and/or property has to have the capacity to carry the debt service and eventually be able to pay back the loan.

SBA Programs For Women Last week the SBA announced increased efforts to expand SBA opportunities to “women-owned small businesses (WOSB) and economically disadvantaged women-owned small businesses (EDWOSB).” The stated purpose is to give these groups greater access to obtaining government purchasing contracts and to remove contract size limitations. These proposals are currently out for public comment. If you have a perspective, contact your congressman or state legislator.

Learn more about Commercial Corp Finance or read past reports.

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