SBA application processing and underwriting requires great attention to detail and planning to successfully navigate the SBA’s application and approval process. After submitting an application to the Loan Guaranty Processing Centers (LGPC), even the most diligent SBA professionals can be caught off guard by a “screen out” or “denial” of the loan application. In most cases, these issues raised by the SBA can be addressed satisfactorily and promptly; however, in some cases the “screen out” or “denial” is a result of new directives from the SBA’s Washington, DC headquarters or the LGPC Center Director. Sometimes these policy positions are never formally published in the SOP or can be new directives that have not yet been published.
We have assembled a list of some new or unwritten policy mandates that have impacted loan applications we’ve processed:
- Pending Divorce: The SBA generally will not approve a loan application when it is known one of the Principals is undergoing a pending divorce. It is treated similarly to any other pending litigation against the company or its Principals. Approval is consequently withheld until a final divorce decree and settlement agreement is established. However, the SBA does grant approval under some rare circumstances where there are compelling mitigating factors (i.e. a detailed prenuptial agreement). If you become aware of a pending divorce while an application is in progress, first try to determine if factors are present that mitigate the risk and present them to the SBA. If there are no factors present that would mitigate the risk, be prepared to discuss with the Applicant the likelihood of potential significant delay until the divorce is settled.
- Refinancing SBA 7(a) Debt: The SBA has and does allow existing SBA guaranteed debt to be refinanced by a new SBA 7(a) loan. However, after issuance of SOP 50 10 5 (J), the SBA made it clear that it believes SBA loans are inherently originated on reasonable terms and that it does not allow reasonable loans to be refinanced with SBA proceeds. The LGPC now closely scrutinizes every SBA guaranteed debt refinance request and approves them on a case-by-case basis. There must be a great benefit to the borrower any time an SBA loan is refinanced, otherwise the SBA refinance component of the application will be denied. We find that LGPC is more receptive to situations where: 1) there is written evidence the existing lender cannot or will not modify the existing loan terms or provide new financing; 2) the interest rate structure is adjusted in favor of the borrower. For example, fixing an interest rate that is currently variable or decreasing the interest rate spread by a meaningful amount; and 3) the new application provides additional capital towards a real estate purchase, equipment, new working capital, or construction, and the SBA debt refinance component represents a minority portion of the loan proceeds.
- Refinancing Merchant Advance Debt: It seems small businesses are increasingly using merchant advance debt to fund longer term working capital and even long- term fixed assets. These credit facilities can be toxic to a small business because they have astronomical implied interest rates and fees compounded with very short amortizations. Merchant Advance Debt is not actually a loan, it is the purchase of future credit card receivables at a discount with fees. The hefty payments evaporate most available cash flow and can easily lead to a small business’s demise. The SBA has recently considered these credit facilities as “ineligible” to be financed with SBA proceeds, at least through General Processing. We have not been provided a clear explanation as to why SBA has taken this policy decision at this time, but we have been very clearly told Merchant Advance debt is currently not eligible to be refinanced by the SBA.
- Loan Term – Leasehold Improvements: Generally, Leasehold improvements are assigned a term of up to 10 years. However, in some cases with substantial fit out and a long term below market lease, the Leasehold Improvements were permitted to have a term of up to 25 years. The SBA has recently decided to cap and clearly define the maximum Leasehold Improvement term at 15 years. Lenders should generally try to keep the term at 10 years or less.
Our hope is that this article will help some of our new or experienced fellow SBA professionals avoid loan process complications caused by these loan policy mandates. If you are experiencing challenges with loan application processing or underwriting, our expert team can assist.
By: Christopher A. Meccariello
Chief Operating Officer